Excellant Scott,
You Sir are a Wizzard, creating possibility out of thin air...
As For Greenspan...his very Words:
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Greenspan: Economy Should Stay Solid
By DAVE SKIDMORE
.c The Associated Press
WASHINGTON (AP) -- Americans ''can justifiably feel proud'' of the economy and its performance should remain solid this year, Federal Reserve Chairman Alan Greenspan said today. But dangers ranging from a potential stock market drop to possible inflation pressures threaten, he cautioned.
His balanced assessment of risks to what has become the longest peacetime expansion in U.S. history strongly signals that the central bank plans no changes in interest rates, either up or down, in the next few months.
''Our economy's performance should remain solid this year, though likely with a slower pace of economic expansion and a slightly higher rate of overall inflation than last year,'' Greenspan told the Senate Banking Committee as he delivered the Fed's semiannual report to Congress.
''In many respects, the fundamental underpinnings of the recent U.S. economic performance are strong,'' he said. ''But after eight years of expansion, the economy appears stretched in a number of dimensions, implying considerable upside and downside risks to the economic outlook.''
He warned of threats that could either push the economy toward recession, requiring lower interest rates to stimulate buying demand, or reignite inflation, requiring higher rates to cool demand.
''Monetary policy must be ready to move quickly in either direction should we perceive imbalances and distortions developing that could undermine the economic expansion,'' he said.
Economists and financial markets were anticipating just such an evenhanded assessment. The Dow Jones industrial average dropped more than 90 points from the moment his testimony was released but it fully recovered in less than 45 minutes.
''There's no suggestion, nor hint, that the Federal Reserve, anytime soon or perhaps longer, is going to change rates,'' said economist Allen Sinai of Primark Decision Economics in New York. ''But, to me, there were all kinds of suggestions that when the time comes it will be toward higher rates.''
In listing the potential imbalances, Greenspan, who first began warning of ''irrational exuberance'' on Wall Street more than two years ago, said, ''Equity prices are high enough to raise questions about whether shares are overvalued.''
A ''downward correction to stock prices'' would, he said, threaten the household consumption spending and business investment that has propelled growth at an above-average rate topping 4 percent for three consecutive years.
Plus world financial turbulence, most recently demonstrated with the sharp devaluation of Brazil's currency last month, continues to pose the danger of ''knockoff effects in financial markets and the economies of Brazil's important trading partners, including the United States,'' he said.
Moreover, fading growth in key U.S. industrial trading partners could further depress demand for U.S. exports.
The big rise in the U.S. trade deficit, to a record $169 billion last year, has had some positive effects, he said. It's cushioned the weakness in U.S. trading partners and acted as a safety valve for strong U.S. demand.
But it also has ''disquieting aspects,'' he warned. It means Americans owe increasing amounts of debt to foreigners and, should that come into question, ''The exchange value of the dollar may well decline, imparting pressures on prices in the United States.''
He said inflation pressures ''in all likelihood will not intensify significantly in the year ahead'' but cautioned that buyers will no longer benefit from sharply falling oil prices.
And, he said, ''worker depletion'' -- the shortage of skilled employees -- ''constitutes a critical upside risk to the inflation outlook,'' namely that accelerating wage increases would put pressure on prices.
''Should labor market conditions continue to tighten, there has to be some point at which ... prices inevitably will begin to accelerate,'' he said.
In their forecast for the economy, Fed policy-makers are projecting inflation between 2 percent and 2.5 percent this year, up from 1.6 percent last year. They expect growth in the gross domestic product between 2.5 percent and 3 percent, down from 4 percent last year. The unemployment rate should remain between 4.25 percent and 4.5 percent, about at the 29-year low where it is now.
If that forecast pans out as expected, the Fed could keep its benchmark short-term interest rate -- the rate charged on overnight loans between banks -- at 4.75 percent for six to nine months, Sinai said. It had cut the rate three times over seven weeks this fall, from 5.5 percent.
On a separate topic, Greenspan said the ''overwhelming majority'' of banks have made impressive progress in readying their computer systems for the turn of the century. A small minority have fallen behind and have been targeted for followup by regulators.
Nevertheless, the central bank will have stockpiled $200 billion in cash by late 1999, he said.
''While we do not expect currency demand to increase dramatically, the Federal Reserve believes it is important for the public to have confidence in the availability of cash in advance of the rollover,'' he said.
AP-NY-02-23-99 1119EST
|
