Inflation ahead?

Wealth effect : Fed chairman worries surging stock market may tax economy and hike prices.

January 19, 2000

FEDERAL RESERVE Chairman Alan Greenspan often sounds like a wet blanket. Last week, Mr. Greenspan again expressed concern over surging stock prices and their possible detrimental impact on what is likely to be the nation's longest economic recovery.

Speaking before the Economic Club of New York, Mr. Greenspan returned to his familiar theme: We are witnessing an unprecedented spurt in productivity that has brought the nation extremely low levels of unemployment without inflation and significantly increased national wealth, but pressures are building that may end this trend.

Mr. Greenspan has fretted for several years that as consumers turn this wealth into spending, the economy will lose its ability to furnish the supply of goods and services demanded. So far, labor productivity, record imports and a stable dollar have made the chairman's worries seem unfounded. Some commentators talk about a new economic era where some of the basic economic rules -- such as low unemployment causing inflation -- no longer apply.

Mr. Greenspan doesn't subscribe to these beliefs. He believes the seeds of this recovery's destruction have been sown.

He doesn't care whether the seeds of the next recession are in the vast amounts of wealth that can be converted to spending, the lack of available labor or the potential for a federal spending spree. He knows that raising interest rates will deny them nourishment.

Mr. Greenspan continually stresses that his intent is to extend the current recovery. There is little doubt that when the Federal Reserve Open Market Committee meets in early February, it will vote to raise interest rates.

For the past nine years, Mr. Greenspan has exhibited a deftness with interest rates. It's a good bet that this next hike won't curtail the recovery just yet. Neither will slower economic growth assuage Mr. Greenspan's fears that inflation is a danger.

As long as there is growth, the chairman will worry.

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