Wall St Unmoved By Fed Assurance It Isn't Targeting Stks
7/26/0 16:42 (New York)
By Joseph Rebello
WASHINGTON (Dow Jones)--Alan Greenspan says he's had a change of heart: the
Federal Reserve is no longer trying to enforce sobriety in the stock market.
But he's having a hard time persuading politicians and investors of his
conversion.
In the last four months the Fed chairman has repeatedly sought to reassure
lawmakers that the central bank isn't trying to depress stock prices. He did
so
again Tuesday in a semi-annual appearance before the House Banking Committee,
interrupting a lawmaker at one point to emphasize the change in his views.
"Let me just say for the record: We do not, and have not, been targeting
the
stock market for purposes of endeavoring to stabilize this economy,"
Greenspan
told Rep. Barney Frank, a Massachusetts Democrat. "We react if and when stock
market price changes impact on the economy..."
Frank wasn't impressed. Nor are most investors. In three-and-a-half years
since Greenspan caused global stock prices to tumble by warning against
"irrational exuberance," analysts say, the Fed has conditioned investors to
believe that ascending stock prices will lead to an increase in interest
rates.
Raising Rates To Curb Stocks Brings Political Criticism
The Fed, most economists say, has perfectly sensible reasons for trying to
prevent sudden, dramatic movements in stock prices. A steep and persistent
increase in stock prices encourages consumers to spend more than they
otherwise
would, creating an inflationary risk. Just as surely, a steep and persistent
decline in stock prices reduces spending and slows economic growth.
The Fed makes no secret of its willingness to cut interest rates in
response
to a large and sudden drop in stock prices. "We do respond to sharply reduced
asset prices which will create a seizing-up of liquidity in the system,"
Greenspan told a gathering of central bankers in Wyoming last year. But, at a
time when as many as 60% of Americans own stocks, the Fed is wary about
appearing too eager to raise rates in response to rising stock prices.
Lawmakers like Frank, after all, are quick to remind the Fed of the social
unfairness of raising interest rates to curb stock prices. "Telling people at
the lower end of the American economic scale that they must accept a
worsening
in their condition because people at the upper end have been doing well is
economically unsound, politically unwise and morally unacceptable," Frank and
15 other Democratic lawmakers told Greenspan in a letter last month.
Fed Has Worried About Stock Bubbles At Least Since 1994
The Fed obfuscates as a result, said Brian Wesbury, an economist with
Griffin, Kubik, Stephens & Thompson Inc. in Chicago: the central bank says it
focuses not on the stock prices themselves, but only on their effects. "What
I
call this is a distinction without a difference," Wesbury said. "It's like
saying, 'I'm not worried about the rain, I'm worried about the streets
getting
wet.' I don't think it fools anyone."
Greenspan has been perturbed by the rise of U.S. stocks at least since
1994,
when the Fed began raising interest rates after a five-year pause. "When we
moved on Feb. 4, I think our expectation was that we would prick the bubble
in
the equity markets," Greenspan told his colleagues at a meeting on March 24
of
that year. "What has in fact occurred is that...while the stock market went
down after our actions on Feb. 4, it went down quite marginally on net over
this period."
But those transcripts didn't become public until this year. So investors
didn't learn of the Fed's worries about stock-market bubbles until December
1996, when in a speech Greenspan posed a rhetorical question that he left
unanswered: "How do we know when irrational exuberance has unduly escalated
asset values, which then become subject to unexpected contractions as they
have
in Japan over the past decades?" Stock prices around the world plummeted in
response, and Senate Majority Leader Trent Lott reprimanded Greenspan for his
remarks.
Greenspan Says He Changed His Mind After Careful Study
After the furor, Greenspan would never again even speculate about the
existence of a stock-market bubble. He now argues that "to spot a bubble in
advance requires a judgment that hundreds of thousands of informed investors
have it all wrong" and that "betting against markets is usually precarious at
best."
Greenspan, testifying before the House Banking Committee Tuesday, rejected
any suggestion that the Fed has been disguising its true intentions about the
stock market. Instead, he said, he simply changed his mind about the
desirability of pricking stock-market bubbles.
In his irrational-exuberance speech, he said, "I raised the whole broad
issue
of whether monetary policy should direct itself in part at least, at asset
values generally. Prior to that...I frankly wasn't clear on whether we should
or we shouldn't....In subsequent evaluations and a good deal of thinking
about
the process, I concluded not."
Some Experts Say Fed Was Clearly Targeting Stks This Year
That, he said, is "my judgment as of today" and has been so "for the last
two
or three years." But just five months ago, Greenspan told Congress the Fed
would need to raise interest rates to ensure that stock and property prices
rise "no faster than household incomes." That remark, analysts say, prompted
Wall Street to brace for a series of interest-rate increases. The Fed
delivered
three increases in all, halting the rise of the stock market. So far this
year,
the broad Wilshire 5000 index has declined about 1.5%.
"It sure looked to me like they were targeting the stock market," Wesbury
said. Still, he credits the Fed with accomplishing an extraordinarily
delicate
task: raising interest rates just enough to slow the economy without
triggering
a crash in stock prices. "While the Fed is frustrating to listen to, we can
all
see what they're doing, and it's working," he said. The Fed, as a result, now
is likely to leave rates unchanged for the remainder of the year, he said.
Bill Dudley, an economist with Goldman Sachs in New York, said Greenspan
may
have reconsidered the wisdom of publicly linking asset prices, household
incomes and interest rates in his testimony to Congress in February. "That
sounded an awful lot like he was targeting the stock market, and he was taken
to task for it by politicians," Dudley said. "I think he's now trying to
backtrack a little." |
