To all - WSJ's "take" on the Greenspan speech tonight.
January 14, 2000
Greenspan Warns Stock Market
Is Pushing Economy to the Limit
By JACOB M. SCHLESINGER
Staff Reporter of THE WALL STREET JOURNAL
WASHINGTON -- U.S. Federal Reserve Chairman Alan Greenspan issued a
stark warning that the stock market's surge is pushing the economy beyond its
limits, in a speech that said nothing to counter widespread expectations that the
central bank will continue next month its campaign to raise interest rates.
Still, Mr. Greenspan also used his closely watched
address last night before the Economic Club of New
York to suggest that the drive may not be as
aggressive in the coming months as some analysts
have feared. He declared that the process of
containing "the wealth-induced excess of demand" is
"already well advanced," according to an advance text
of his remarks made available here.
He specifically noted that corporate-borrowing costs
had risen by about a percentage point over the past
two years and that the economic "balance" that the
Fed is seeking will be struck "through higher
borrowing rates."
Thursday's address was Mr. Greenspan's latest
in a series of attempts to grapple with the
booming stock market and the dilemma that it
poses for the central bank. Fed officials have
insisted repeatedly that they aren't trying to curb
the highflying Dow Jones Industrial Average and that they aren't attempting to
judge whether or not the market is a bubble.
Still, the Fed views its job as attempting to curb economic activity when the
pace looks too rapid, and Mr. Greenspan made clear Thursday that he believes
the stock market is playing an ever-greater role in pushing growth into
overdrive.
Stock gains, by making shareholders wealthier, "have tended to foster
increases in aggregate demand beyond the increases in supply," he wrote in the
text of his speech. "It is this imbalance ... that contains the potential seeds of
rising inflationary and financial pressures that could undermine the current
expansion."
He estimated that the stock market alone was responsible for about one-fourth
of the rapid growth of the past three years -- about one percentage point of the
4% annual rise in gross domestic product since late 1996.
Serious inflation has yet to emerge despite this rapid, stock-market driven
growth. Indeed, Thursday morning, the Labor Department reported that price
gains at the wholesale level -- excluding volatile food and energy prices -- had
actually slowed in recent months. But Mr. Greenspan made clear that the Fed
was willing to act before price pressures emerged. "Regrettably, we at the
Federal Reserve do not have the luxury of awaiting a better set of insights" into
the impact of soaring financial wealth on the economy, he said.
Financial markets have long been braced for the Fed to boost its federal funds
rate target by one-quarter percentage point on Feb. 2, following three similar
moves last year. But some analysts have suggested that the Fed could increase
rates by a more extreme, half point in February, or that it will keep raising rates
a quarter point through a series of meetings through next year.
In what may have been a not-so-subtle hint to lawmakers and presidential
candidates, Mr. Greenspan said the Fed would be more likely to keep rates
lower if politicians didn't squander the mounting budget surpluses.
"Both the administration and Congress have chosen wisely to allow ... budget
surpluses to build," which he said had "absorbed a good part of the excess of
potential private demand" by keeping money out of taxpayers' wallets.
"I trust that the recent flurry of increased federal government outlays,
seemingly made easier by the emerging surpluses, is an aberration," Mr.
Greenspan added, perhaps sarcastically. Congress last year broke tight
spending caps, and both political parties are now scrambling to carve up
projected surpluses for tax cuts or new spending.
While his warnings were the most noteworthy part of his prepared remarks,
the bulk of Mr. Greenspan's speech was actually devoted to his famous
optimism -- his view that, despite some potential warts, the U.S. economy has
been transformed for the better by technology in recent years.
"The evidence of dramatic innovations -- veritable shifts in the tectonic plates
of technology -- has moved far beyond mere conjecture," he said.
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