I am sure you will appreciate that as Greenspan is a political guy, he chose his words very carefully. As you can easily see from the report below, Greenspan, whilst waxing positive on the US economy and strength of the dollar and paying tribute to technology and the "new economy", was also subtle at the same time in reminding investors to watch their collective butt!!!
Any idea how goldbugs are going to, or are supposed to, interpret this?
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July 23, 1997
Fed Chairman Gives No Hints
Of Rate Hike; Markets Climb
Greenspan Says Economy Is 'Exceptional,'
Notes Slow Growth, Prices Nearly Stable
By DAVID WESSEL
Staff Reporter of THE WALL STREET JOURNAL
WASHINGTON -- Federal Reserve Chairman Alan Greenspan testified for three
hours on Capitol Hill Tuesday and gave no hint that an interest-rate increase is
imminent, sending stocks and bonds soaring.
Appearing before the House Banking Committee, Mr.Greenspan hailed the current
state of the economy as "exceptional," said the U.S. has "as close to stable prices as
I've seen since the 1960s," and welcomed the recent slowing of economic growth.
"For the present ... demand growth does appear to have moderated," he said. But it is
"an open question" whether it has moderated sufficiently to avoid stoking inflation.
Interest rates "will need to be changed at some point to foster sustainable growth and
low inflation," but he didn't say when.
Financial markets cheered the absence of any threats about inflation or higher rates.
The Dow Jones Industrial Average rose 154.93 to close at a high of 8061.65. Rising
bond prices pushed yields on 30-year bonds to the lowest level since early December.
The yield of the bellwether bond was quoted at 6.41% Tuesday, down from 6.54%
the day before.
The Fed raised its key short-term interest rate by one quarter of a percentage point in
March but has since held the rate steady. Fed policy makers next convene on Aug. 19.
Temporary or Long-Term Upturn?
The Fed chief said it is difficult to tell if the "exceptional economic situation" reflects
only temporary factors -- such as the strong dollar and the lull in health-care cost
increases -- or the more significant long-term upturn in productivity trends that he has
been talking about for years.
Mr. Greenspan long has argued that computer technology may pay a significant
productivity dividend, and lately he has suggested that it finally may be showing up.
"Important pieces of information ... could be read as indicating basic improvements in
the longer-term efficiency of our economy," he said, raising the possibility that the
world is undergoing "a once- or twice-in-a-century phenomenon that will carry
productivity trends nationally and globally to a new higher track."
But the Fed chairman insisted that he isn't, as some have suggested, running a
monetary-policy experiment by deliberately prodding the economy "to see how far and
fast it can grow" because "the costs of a failed experiment would be much too
burdensome."
Criticism From Some Congressmen
Despite Mr. Greenspan's optimistic outlook, several House members insisted that the
Greenspan Fed remains too focused on fighting nonexistent inflation. Rep. Barney
Frank (D., Mass.) described the Fed's 12-member policy committee as "12 pessimists
in search of some gloom," though he later suggested that he had stronger disagreements
with some other Fed officials than with Mr. Greenspan. Mr. Greenspan had little to say
about the heights to which the stock market has soared. "With the economy performing
so well for so long," he said, "financial markets have been buoyant, as memories of
past business and financial cycles fade with time."
In its semiannual report to Congress, the Fed detailed the various ways in which stock
prices now exceed historical norms, such as the relationship between price/earnings
ratios to yields on 10-year Treasury notes. The report noted that Wall Street analysts
expect
earnings to grow more over the next three to five years than at any time since the deep
recession of the 1980s, when earnings were starting from such a low level that big
percentage gains were inevitable.
Mr. Greenspan said Fed officials expect the economy to grow between 3% and
3.25% this year, somewhat faster than their February predictions, and to expand
between 2% and 2.5% in 1998. At that rate of growth,
the Fed expects the jobless rate to remain between 4.75% and 5% in both years. The
officials expect consumer prices to rise between 2.25% and 2.5% this year, as inflation
has been restrained by favorable food-and energy-price trends that aren't likely to
persist. They
expect prices to climb at a slightly faster pace next year, between 2.5% and 3%. |
