Greenspan Is Ready to Increase
Rates if Growth Doesn't Relent
By JACOB M. SCHLESINGER
Staff Reporter of THE WALL STREET JOURNAL
WASHINGTON -- Federal Reserve Chairman Alan
Greenspan made clear that he remains poised to boost
interest rates further, though he acknowledged that
inflation seems well under control.
"While there is scant evidence of any imminent resurgence
of inflation at the moment, there also appears to be little
slack in our capacity to produce," Mr. Greenspan wrote in
remarks prepared for delivery Thursday night to New York
University's Stern School of Business. "Should the
expected slowing in the growth of demand fail to
materialize, we would need to address any emerging
pressures in product and credit markets."
ALSO AVAILABLE
See the full text of Federal Reserve Chairman Alan
Greenspan's speech Thursday.
Those two sentences were the closest Mr. Greenspan
came in his 11-page speech to tipping his hand about what
Fed policy makers will do when they next meet to decide
monetary policy May 20. Most of the talk to his alma
mater was a response to the criticism he has received for
boosting rates March 25, as well as his assessment of the
economy's long-term potential, which was fairly positive.
The comments don't necessarily signal that the Fed will
raise rates this month, since some recent government
reports indicate the economy may be slowing. But Mr.
Greenspan said, in discussing the March move, that he
prefers to err on the side of running monetary policy too
tight rather than too loose.
"Even if it should appear in retrospect that we could have
skirted the dangers of credit excesses without a modest
tightening, the effect on the expansion would be small,
temporary," he said. "Like most insurance, its purchase to
protect against possible adverse outcomes would still be
eminently sensible." He added, "It would be folly not to
endure the small immediate discomfort of a vaccination
against the possibility of getting a serious disease."
'Significant Lag'
Mr. Greenspan also defended acting before inflation
actually has accelerated. While a Fed rate increase would
"affect the financial markets immediately," he noted, it
would "work with a significant lag of several quarters or
more on output and employment, and even longer on
prices."
Addressing underlying trends, Mr. Greenspan said, "there
are many reasons to be optimistic about the economy's
prospects." He gave a nod to the growing minority of
experts who argue that productivity may be picking up,
despite the gloomy official numbers. Recent growth, he
said, "suggests there may be an undetected delayed
bonus from technical and managerial efficiencies coming
from massive advances" in computers and
telecommunications. He reiterated his prior statements
that technology and trade also may allow the economy to
grow more without straining its resources.
Still, Mr. Greenspan stressed that those observations have
greater implications for the long run than for current policy
making. He noted that, as recently as 1994, the economy
was clearly straining its capacity. "It would stretch
credulity to believe that capacity growth has accelerated at
a sufficient pace to produce a large degree of slack at this
moment," he argued. "It is just not credible that an
economy as vast and complex as that of the United States
could have changed its underlying structure in the short
time since then."
source: interactive5.wsj.com |
