Thursday, July 29, 1999
Greenspan repeats interest-rates warning
Local analyst is upbeat
BY MICHAEL McKEE
Bloomberg News AND
AMY HIGGINS
The Cincinnati Enquirer
WASHINGTON — Federal Reserve policy-makers might raise interest rates again because the U.S. economy could be growing too quickly, raising the risk inflation is likely to accelerate, Fed Chairman Alan Greenspan told the Senate Banking Committee on Wednesday.
Mr. Greenspan's warning mirrored his testimony to the House Banking Committee last Thursday. The text of his remarks was identical. By law, the Fed chairman must report on the central bank's view of the economy and monetary policy to both committees twice a year, in February and July.
His remarks — hardly unexpected — helped bolster stocks, leading the Dow Jones industrial average to an intra-day high of 11,023.99. The Dow closed at 10,972.07, down 6.97 points for the day.
The Nasdaq rose 26.51, or 1 percent, to 2705.84, extend ing Wednesday's 2.3 percent advance. The Standard & Poor's 500 Index climbed 2.56, or 0.2 percent, to 1365.40.
Rick Reynolds, portfolio manager with Cincinnati's Bartlett & Co., said Wednesday's market reflected much more than Mr. Greenspan's repeated warning.
“The concern about rising interest rates has been partly ameliorated by good earnings reports,” Mr. Reynolds said. “Generally, there's good news out there.”
Because of the good news, Mr. Reynolds said he doesn't think inflation is looming. Mr. Greenspan's testimony is offset by other factors — including consumer confidence, pro ductivity and employment figures.
“The net today was nothing happened” in the stock markets, Mr. Reynolds said.
While Mr. Greenspan avoided a specific signal that the Fed's policy-setting Open Market Committee would raise the overnight bank loan rate again at its next meeting Aug. 24, he talked of another “pre-emptive” attack on inflation.
The Fed's Open Market Committee raised the overnight bank rate at its latest session June 30.The central bankers announced they were no longer predisposed toward another increase any time soon — but a statement noted that members were “especially alert to the emergence, or potential emergence, of inflationary forces that could undermine economic growth.”
Also Wednesday, Mr. Greenspan warned anew of a possible “euphoric” rise in stocks fueling increased consumer spending. “If new data suggest it is likely that the pace of cost and price increases will be picking up, the Federal Reserve will have to act promptly and forcefully so as to preclude imbalances from arising that would only require a more disruptive adjustment later,” he said.
Over the past week, economic reports have offered a mixed picture. The Mortgage Bankers Association said Wednesday that new mortgage applications fell 3.2 percent last week. A survey of consumer confidence released Tuesday, however, showed that more Americans plan to buy houses over the next six months.
Employment growth has exceeded the growth of the working-age population by almost half a percentage point this past year. That implies that gross domestic product — the output of all goods and services in the economy — “is growing faster than its potential” and a worrisome sign, Mr. Greenspan said.
The Fed's official forecast is for a 3.5 percent to 3.75 percent GDP growth rate this year. That's just below the roughly 4 percent expansion the economy sustained during the first six months of the year and for each of the past two years.
If unemployment falls any farther than the 4.2 percent to 4.3 percent rage of recent months, that would be “one indication that inflation risks were rising,” Mr. Greenspan said.
“There can be little doubt that, if the pool of job seekers shrinks sufficiently, upward pressures on wage costs are inevitable,” he said. “Such cost increases have invariably presaged rising inflation in the past, and presumably would in the future, which would threaten the economic expansion.”
So far, “increasingly evident” increases in productivity growth are holding down inflationary pressures, Mr. Greenspan said.
After languishing at about 1 percent in the 1970s and 1980s, productivity growth has been above 2 percent the past three years. Over the past four quarters it's increased 2.8 percent, and could reach 3.5 percent if second quarter growth comes in close to 4 percent, he said.
He warned, however, that productivity must continue to increase at an ever-faster pace to keep inflation from accelerating. “Should the increments of gains in technology that have fostered productivity slow, any extant pressures in the labor market should ultimately show through to product prices,” Mr. Greenspan said.
The end of the global economic slowdown also raises inflation risks, Mr. Greenspan said. “Improving global prospects also mean that the U.S. economy will no longer be experiencing declines in basic commodity and import prices that held down inflation in recent years,” he said.
And there are signs the economy could slow if stock markets don't continue “outsized” gains, consumer spending could ease, and business investment fall back, Mr. Greenspan said. Still, with “large unexploited long-term profit opportunities” available from low inflation and the growth of technology, “the typical cyclical retrenchment could be muted,” he said.
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