CAPITAL VIEWS: Greenspan Said `I Do Not Know What To Do`
27 Jan 08:52
By John Connor
A Dow Jones Newswires Column
WASHINGTON (Dow Jones)--"What do we do with monetary policy when there is no
inflation but asset prices are booming?" Cathy Minehan, president of the
Federal Reserve Bank of Boston, asked at an August 1997 Federal Open Market
Committee meeting.
Fed Chairman Alan Greenspan recalled that he had raised this question in a
speech "just before the sentence in which I expressed concern about how will we
know when we encounter irrational exuberance," according to a transcript of the
meeting released by the Fed last week.
"Yes, in your AEI speech," Minehan said, referring to the December 1996
speech at an American Enterprise Institute function in which Greenspan raised
the subject of irrational exuberance.
"We have not been able to address that issue because I don't think we know
how to handle a problem where we have one instrument and conflicting goals,"
Greenspan said at the August 1997 FOMC meeting.
"What do we do?" the Fed chairman asked. "What should the Japanese have done
when confronted with a very benign product price environment and rapidly
escalating asset prices?"
Minehan responded: "Hindsight tells us to prick the bubble sooner, but how
does foresight tell us we have a bubble?"
To which Greenspan said: "That was the context of that (AEI) speech, and the
state of my knowledge, at least, has not gone beyond that.
"I do not know what to do," the Fed chairman added.
"It had some success," Minehan said in an apparent reference to Greenspan's
AEI speech.
"Temporarily," Greenspan remarked.
Minehan raised the subject of booming asset prices right after an exchange
between Greenspan and St. Louis Federal Reserve Bank President Thomas Melzer,
who had said, "I worry a little about whether there will be a defensible
rationale that will permit us to act before inflation actually starts to rise.
That is going to be a challenge."
Greenspan agreed, saying "I think it's going to be difficult" because "the
longer we are in a period where the economy remains exceptionally tight and
price inflation continues to go down, the more difficult it will be for us to
make a credible case for a policy tightening move...."
Minehan then noted an uptick in housing-related components of CPI, and cited
"increases in other asset prices that people are worried about, obviously the
stock market, nonresidential real estate, and so forth," and asked what to do
with monetary policy when asset prices are booming and there's no inflation.
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(John Connor, a veteran observer of the financial markets and the Washington
scene, is Washington bureau chief for Dow Jones Newswires. He can be reached by
E-Mail at John.Connor@DowJones.Com)
(END) Dow Jones Newswires
01-27-03 0852ET |
