Greenspan Indicates Fed Dropped Bias
Toward Tightening at August Meeting
Dow Jones Newswires
WASHINGTON -- Federal Reserve Board Chairman Alan Greenspan all
but confirmed that the central bank abandoned its bias toward tightening at
its last policy-setting meeting and admonished fellow central bankers to
weigh carefully the ramifications of recent financial market turmoil.
In a speech Friday at the University of California at Berkeley, Mr.
Greenspan suggested that the U.S. can't escape the turmoil and pressures
of the international marketplace
"It is just not credible that the United States
can remain an oasis of prosperity unaffected
by a world that is experiencing greatly
increased stress," Mr. Greenspan said.
"Developments overseas have contributed to
holding down prices and aggregate demand in
the United States in the face of strong domestic spending. As dislocations
abroad mount, feeding back on our financial markets, restraint is likely to
intensify," Mr. Greenspan said.
In his most explicit reference to the Federal Open Market Committee's
deliberations, Mr. Greenspan indicated that the FOMC abandoned its bias
toward tightening at its most recent session. The minutes from that meeting
have not yet been made available.
"In the spring and early summer, the Federal Open Market Committee
was concerned that a rise in inflation was the primary threat to the
continued expansion of the economy," Mr. Greenspan said.
"By the time of the Committee's August meeting, the risks had become
balanced, and the Committee will need to consider carefully the potential
ramifications of ongoing developments since that meeting."
While indicating that pressures on the economy were "balanced," Mr.
Greenspan restated the need for vigilance on inflation. "To be sure, labor
markets are unusually tight, and we should remain concerned that
pressures in these markets could spill over to costs and prices. But to
date, they have not."
Mr. Greenspan raised several questions about the rationality of
assumptions of securities analysts, and thereby indirectly questioned the
level of stock prices based on such assumptions.
"Security analysts' recent projected per-share earnings growth of more
than 13% over the next three to five years is unlikely to materialize," Mr.
Greenspan said.
"It would imply an ever increasing share of profit in the national income
from a level that is already high by historic standards," Mr. Greenspan
said. "Such conditions have led in the past to labor market pressures that
thwarted further profit growth."
Mr. Greenspan restated a quip in which he chided markets for looking for
earnings too far into the future, even in an atmosphere of near price
stability and reduced threat of inflation. "Current claims on a source of
income available 20 or 30 years in the future still have current value. But
should claims on the hereafter?" Mr. Greenspan asked.
High equity market values relative to income and production also increase
potential for economic swings and should give people reason for "caution,"
Mr. Greenspan said.
"Since equity values are demonstrably more variable than incomes, when
equity market values become large relative to incomes and GDP, their
fluctuations can be expected to affect GDP more than when equity market
values are low," Mr. Greenspan said.
"Clearly, the history of large swings in investor confidence and equity
premiums for rational and other reasons counsels caution in the current
context," Mr. Greenspan said.
"We have learned in recent weeks that just as a bull stock market feels
unending and secure as an economy and stock market move forward, so it
can feel when markets contract that recovery is inconceivable. Both, of
course, are wrong," Mr. Greenspan said.
"The immediate cause of the economic breakdown [in Asia] was an
evident pulling back from future commitments" where the emergence of
excess worldwide capacity in semiconductors may have been a triggering
event, he said.
"The process became self-feeding as disengagement from future
commitments led to still greater disruption and uncertainty, rising risk
premiums and discount factors, and a sharp fall in production," Mr.
Greenspan said.
In contrast, expectations played a generally more positive role in the U.S.
where "the rise in stock prices also meant a fall in the equity cost of capital
that doubtless raised the pace of new capital investment," Mr. Greenspan
said.
Higher stock prices also reduced the cost of capital. "Coupled with the
quickened pace of productivity growth, wage and benefit moderation has
kept growth in unit labor costs subdued in the current expansion. this has
both damped inflation and allowed profit margins to reach high levels," Mr.
Greenspan said.
But even virtues can become a vice, he noted.
Japan has had savings and investment rates far higher than those in the
U.S., but its per capita growth potential now "appears to be falling relative
to ours," he said.
"This phenomenon of over investment is observable even among more
sophisticated free market economies .... It is arguable that their hobbled
financial system is, at least in part, a contributor to their economies'
subnormal performance," he said. |
