Greenspan mentions Cut.
Greenspan says market turmoil may hurt US economy
By Greg Frost
BERKELEY, Calif., Sept 4 (Reuters) - Federal Reserve Board Chairman Alan
Greenspan warned on Friday that global financial turmoil and Wall
Street's volatility may hurt the U.S. economy and suggested he was as
inclined to cut interest rates as to raise them.
In his first comment on recent tumbling stock prices, the world's most
powerful central banker said the Fed now saw a balance of risks facing
the U.S. economy between deflationary pressures from international
crises and domestic inflation.
''It is just not credible that the United States can remain an oasis of
prosperity unaffected by a world that is experiencing greatly increased
stress,'' Greenspan said in a speech at the University of California in
Berkeley.
Although he did not directly comment on the bank's interest rate policy,
Greenspan said it was a time to be cautious.
''Clearly, the history of large swings in investor confidence and equity
premiums for rational and other reasons counsels caution in the current
context,'' he said.
''We have relearned in recent weeks that just as a bull stock market
feels unending and secure as an economy and stock market move forward,
so it can feel when markets contract that recovery is inconceivable,''
Greenspan said.
''Both, of course, are wrong. But because of the difficulty imagining a
turnabout when such emotions take hold, periods of euphoria or distress
tend to feed on themselves,'' he added.
Greenspan said that in the spring and early summer of this year Fed
policymakers were concerned that the strong U.S. economy would fuel
inflationary price pressures and were thinking about raising rates. But
Asia's economic slowdown has held down prices in the United States
despite robust economic growth.
With wage pressures growing and exports declining, companies have seen
their profits squeezed and analysts have said this was one reason for
the recent stock price tumble.
Greenspan said some profit projections had been unrealistic even with
productivity gains, which lower costs of doing business, continuing at
the high rate of recent years.
''Even if this is indeed the case, and only anecdotal evidence supports
it, security analysts' recent projected per share earnings growth of
more than 13 percent annually over the next three to five years is
unlikely to materialize,'' he said.
The Fed has repeatedly warned that tight labor markets could spill over
into higher wages and prices. Employment data for August released on
Friday showed the economy creating 365,000 jobs and the jobless rate at
4.5 percent.
But Greenspan said the fears had not materialized to date. The Federal
Open Market Committee, the Fed's policymaking arm, saw the risks at its
most recent meeting on Aug. 18 as more balanced between economic
slowdown caused by international events and domestic inflation.
''By the time of the Committee's August meeting, the risks had become
balanced, and the Committee will need to consider carefully the
potential ramifications of ongoing developments since that meeting,'' he
said.
The Fed appeared earlier this year poised to raise interest rates and as
late as July had maintained that bias. The FOMC next meets on Sept. 29,
and a number of economists are calling for a rate cut to ward off a
global recession. They argued that consumers are likely to curb their
purchases as a result of the sharp drop in stock prices over the last
two weeks and Greenspan seemed to agree.
''As dislocations abroad mount, feeding back on our financial markets,
restraint is likely to intensify,'' he said.
Calls for a Fed rate cut also have grown internationally.
Brazil's Finance Minister Pedro Malan, in Washington for a meeting of
top Latin American finance ministers, said the United States needed to
cut rates to aid struggling economies.
''In my opinion, the one idea that should be seriously considered at the
next meeting of the U.S. Federal Open Market Committee should be a
reduction in U.S. interest rates. That was my suggestion and that of
other ministers,'' Malan said at the end of the two-day meeting
sponsored by the International Monetary Fund.
Regards,
R.T |
