Greenspan Hints Of Growth But Warns Of Econ Risks
By Greg Ip
Staff Reporter of The Wall Street Journal
WASHINGTON -- Federal Reserve Chairman Alan Greenspan last night dropped one
of his first hints that his aggressive campaign to revive growth this year
should soon pay off.
But in prepared remarks for a speech last night in New York, he also
outlined a litany of risks to the economy, and he took pains to discount
some recent signs of emerging inflation concerns, suggesting the Fed won't
decide soon to stop cutting rates.
"The period of subpar economic growth is not yet over, and we are not free
of the risk that economic weakness will be greater than currently
anticipated, requiring further policy response," he said. "But we also need
to be aware that our front-loaded policy actions this year should be
providing substantial support for a strengthening of economic activity later
this year."
The speech was Mr. Greenspan's first detailed remarks on the economic
outlook since early March. The reference to a stronger economy later this
year was his most explicit comment on when he expects the current slowdown
to end.
But his far-more detailed discussion of risks to the economy and the
perceived lack of an inflationary threat suggests he doesn't believe the Fed
is moving too quickly. That stands in contrast to the financial markets,
which are beginning to contemplate such a risk. And even one of Mr.
Greenspan's fellow Fed governors, Laurence Meyer, discussed that risk
earlier yesterday.
Echoing the statement that accompanied the Fed's half-point cut on May 15 in
its federal-funds-rate target to 4%, Mr. Greenspan noted that pressure on
profits was "unrelenting," and the demand for capital equipment was
"problematic." While excess inventories are being liquidated, there are
"considerable uncertainties" about when and by how much businesses will
start building them up again.
He said that although consumer spending hasn't been "unduly" soft, there are
"downside risks to consumer spending over the next few quarters" as reduced
stock wealth restrains spending. The Fed chief added that "consumer
sentiment, while having stabilized recently, remains fragile."
On the other hand, Mr. Greenspan played down the impact on consumers of an
expected rise in gasoline prices this summer. "Market forces seem poised to
contain further price increases at the pump," he said.
In recent weeks, financial markets have given signals that some analysts
have interpreted as signs of rising inflation pressure. Mr. Greenspan tried
to put those concerns to rest.
He attributed the jump in long-term Treasury-bond yields relative to
short-term rates to expectations that the government won't be buying back as
much Treasury debt as previously thought.
He acknowledged the inflation rate implied by yields on inflation-indexed
Treasurys relative to normal Treasurys has risen half a percentage point
since mid-March, and that there has been a rise in actual and expected
consumer price inflation.
But he said, "There has been little acceleration in the broader index of
personal consumption expenditures," which he considers a better measure of
inflation.
And, he added, "The lack of pricing power reported overwhelmingly by
business people underscores an absence of inflationary zest . . . With
energy inflation probably peaking and the easing of tightness in labor
markets expected to damp wage increases, prices seem likely to be
contained."
Earlier in the day, Fed governor Meyer said in a speech in Edinburgh,
Scotland, that the Fed has to avoid "overshooting" in efforts to counteract
economic weakness.
"Given that labor markets remain tight, that inflation remains above the
rate that I would find acceptable over the longer run, and that core
inflation has been edging higher, attention must also be given to
calibrating the easing to avoid overshooting in the other direction in a way
that ends up adding to price pressures as growth strengthens," he said.
(END) DOW JONES NEWS 05-24-01
08:20 PM
*** end of story *** |
