FOCUS-Greenspan warns of risks to balanced U.S. economy
February 24, 1998 10:45 AM EST
(Updates with Greenspan testimony, market reaction) By Knut Engelmann
WASHINGTON (Reuters) - Federal Reserve Chairman Alan Greenspan Tuesday described the. economy as "finely balanced" but warned of threats, both from the nation's tight labor markets and Asia's economic turmoil.
The central bank chief told lawmakers in his Humphrey-Hawkins testimony that "storm clouds massing over the Western Pacific" made the outlook for the world's top economy uncertain, and encouraged the central bank to hold steady on its interest rate policy earlier this month.
He insisted that the effects of Asia's crisis should help to delay and moderate possible inflationary pressures stemming from the nation's tight labor markets. "The outlook for...the United States is less assured of late because of storm clouds massing over the Western Pacific and heading our way," he said.
There was little market reaction initially to Greenspan's prepared remarks, with traders seeing the world's most powerful central banker sending mixed signals to the markets.
Greenspan did not mention the word deflation specifically but highlighted the risk that Asia's crisis might dampen both prices and economic growth in the United States "more than is desirable."
However, the central bank chief also noted the "worrisome possibility" that Asia might not cool strong domestic demand in the economy enough to head off a rise in inflation. Greenspan said the Fed could not count indefinitely on a string of good fortune, including the strong dollar and low import prices to hold down inflation forever.
"If, as we suspect, the restraint coming from Asia is sufficient to bring the demand for American labor back into line with the growth of the working-age population desirous of working, labor markets will remain unusually tight, but any intensification of inflation should be delayed, very gradual, and readily reversible," he added.
He outlined two possible alternative scenarios for the U.S. economy, which he said had delivered an "exemplary" performance in 1997.
"We cannot rule out two other, more worrisome possibilities. On the one hand, should the momentum to domestic spending not be offset significantly by Asian or other developments, the U.S. economy would be on a track along which spending could press too strongly against available resources to be consistent with contained inflation.
"On the other, we also need to be alert to the possibility that the forces from Asia might damp activity and prices by more than is desirable by exerting a particularly forceful drag on the volume of net exports and the prices of imports," he said.
With the current situation reflecting a balance of strong countervailing forces, events in the months ahead are not likely to unfold smoothly, he said.
"When confronted at the beginning of the month with these, for the moment, finely balanced, though powerful forces, the members of the Federal Open Market Committee decided that monetary policy should most appropriately be kept on hold," he added.
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