Greenspan Warns About Imbalances
Associated Press Online - January 13, 2000 20:46
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By MARTIN CRUTSINGER
AP Economics Writer
WASHINGTON (AP) - Americans, enjoying the most prosperous times in a
generation, have
fueled a remarkable economic boom, but there are dangers that growing imbalances
could
derail the economic expansion, Federal Reserve Chairman Alan Greenspan said
Thursday.
Speaking to the Economic Club of New York, Greenspan expressed an upbeat
assessment of
the economy's current performance, noting that next month it will become the longest
expansion
in U.S. history, surpassing the 106 months of uninterrupted growth in the 1960s.
"There can be little argument that the American economy as it stands at the beginning of
a new
century has never exhibited so remarkable a prosperity for at least the majority of its
citizens,"
Greenspan said in the speech, copies of which were released in Washington.
However, Greenspan also repeated worries he has voiced before that the Federal
Reserve
must be alert to the growing imbalances between continued strong consumer demand,
bolstered
by Americans' soaring stock portfolios, and the dwindling supply of available workers,
given
that unemployment is now at a 30-year low.
In addition to concerns about rising inflation pressures, Greenspan also repeated
concerns he
has expressed in the past that the huge runup in stock prices could without warning
reverse
itself.
The Federal Reserve has raised interest rates three times in the past six months in an
effort to
slow the economy and relieve pressures on tight labor markets before they trigger
inflationary
wage demands.
While it is widely expected that the Fed will raise rates when they meet again on Feb.
1-2,
Greenspan did not specifically address that issue, saying only that the central bank is
always
forced to make interest-rate decisions based on incomplete evidence of where the
economy is
headed.
"Regrettably, we at the Federal Reserve do not have the luxury of awaiting a better set
of
insights into this process," Greenspan said in the speech. "Indeed, our goal, in
responding to
the complexity of current economic forces, is to extend the expansion by containing its
imbalances."
In all of his comments, Greenspan was careful to balance his worries about the future
with
expressions that some fundamentally beneficial changes are occurring in the economy
that have
given a strong boost to U.S. productivity.
Greenspan said that when economists look back at the current period a decade from
now,
they may well conclude "at the turn of the millennium, the American economy was
experiencing
a once-in-a-century acceleration of innovation which propelled forward productivity,
output,
corporate profits and stock prices at a pace not seen in generations, if ever."
But Greenspan also said there could be an alternative view of the current period when
viewed
in a decade.
"Alternatively, that 2010 retrospective might well conclude that a good deal of what we
are
currently experiencing was just one of the many euphoric speculative bubbles that have
dotted
human history."
That comment echoed Greenspan's famous worry, voiced in December 1996, that
investors
might be in the grip of "irrational exuberance." At the time, the Dow Jones industrial
average
was trading around 6,400.
Despite worries expressed since that time by Greenspan about market valuations, the
Dow
closed on Thursday at a new record of 11,582.43.
In his Thursday speech, Greenspan said that the boom in stock prices, by bolstering
consumer
spending, has probably added around 1 percentage point annually to economic growth
since
1996. The economy during this period has been growing at annual rates of around 4
percent.
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