Greenspan's Speech Focuses on Deflation,
Not Inflation
The New York Times
December 20, 2002
By EDMUND L. ANDREWS
WASHINGTON, Dec. 19 - Alan Greenspan, the
chairman of the Federal Reserve, warned tonight
that deflation, a general decline in prices,
could be more damaging to economic growth
than inflation.
In a speech to the Economic Club of New York, Mr. Greenspan
repeated past assertions that the United States
was "nowhere near" falling into deflation. But he
dwelt on the subject at considerable length
in a somber speech that made it clear he is worried
about the possibility.
"It now appears that we have learned that
deflation as well as inflation are in the long
run monetary phenomena," Mr. Greenspan said.
"Although the U.S. economy has largely escaped
any deflation since World War II, there are some
well-founded reasons to presume that deflation is
more of a threat to economic growth than inflation,"
he continued.
In a deflationary situation, he said, a central bank
has somewhat more difficulty in responding because
it is impossible to reduce interest rates
below zero.
The Fed's benchmark interest rate on overnight loans
between banks is now at 1.25 percent, its lowest level
in 41 years and within striking distance
of the "zero bound."
In both his discussion of deflation and his cautious
assessment of the economic outlook, Mr. Greenspan
reinforced the impression among many
economists that the Fed did not plan to tighten
monetary policy soon.
Speaking to the same forum in which he once
warned about "irrational exuberance" in the stock
market, Mr. Greenspan devoted himself today in
large part to discussing the stock market bubble
that burst two years ago.
As he has before, Mr. Greenspan disputed critics
who have complained that he should have tried
to prick the bubble before it became too big by
tightening monetary policy sooner.
But his tone was subdued rather than defiant.
"Weaving a monetary policy path through the
thickets of bubbles and deflations and their possible
aftermath is not something with which modern
central bankers have had much experience," he said.
He offered a cautious assessment of the current economy.
Though he noted numerous signs of health, he found
at least as many reasons for warning that the economy
is not yet out of the doldrums: the job market is weak,
manufacturing is still in a slump, Europe and Japan
are weaker than the United States, and "geopolitical
risk" - the euphemism for a possible war with
Iraq - is high.
This was the second time in a month that Mr. Greenspan
has devoted considerable time to the topic of deflation.
His comments tonight followed a more extended speech
on the subject last month by another Fed governor, Ben S. Bernanke.
In all those comments, Fed officials have insisted
that they do not face a situation like that of Japan,
which has had declining prices for the past
several years even though the Bank of Japan's
interest rates have been around zero for five years.
Mr. Greenspan and his colleagues argue that
they could, if necessary, pump money into the
economy by buying up longer-term Treasury bills and
perhaps even foreign securities.
But at least some economists argue that the Fed
ought to be acting more assertively already.
"The U.S. economy looks as though it may well be
falling from the high wire of a sustainable economic
recovery," wrote John H. Makin, an economist
at the American Enterprise Institute, earlier this
month, soon after the Fed reduced the federal funds
rate to 1.25 percent from 1.75 percent.
Mr. Makin, whose writings on the subject have drawn
much attention at the Fed, contends that Mr. Greenspan
needs to make a fundamental shift
in strategy - away from pegging monetary
policy to interest rates and toward a renewed focus
on money supply and price levels.
That would in some ways be a return to the strategy
invoked by Mr. Greenspan's predecessor, Paul A. Volcker,
at a time when inflation was soaring
at double-digit rates.
Mr. Greenspan staunchly opposes a strategy based
on money supply, which is very hard to measure in a
world where money takes so many forms.
He also contends that basing policy on
inflation targets would be too much of a
restraint on flexibility.
nytimes.com
Copyright The New York Times Company |
