Fed Concerned About Global Crisis --- NY Times Sep 4,98
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Filed at 9:46 p.m. EDT
By The Associated Press
SAN FRANCISCO (AP) -- Federal Reserve Chairman Alan Greenspan said Friday that central bankers are growing more concerned about the global financial crisis' impact on the U.S. economy and are just as likely to cut interest rates as raise them.
''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 Friday at the University of California, Berkeley.
In the spring and early summer, Federal Reserve policymakers had been more concerned about the threat of renewed inflation in the United States, Greenspan said. At their meetings during this period, they adopted a policy stance signaling they stood ready to raise interest rates at the first sign of significant inflation.
But Greenspan suggested in Friday's speech that the same policymakers at their August meeting decided that the global turmoil posed a growing threat to U.S. prosperity -- and are now just as likely to vote to cut interest rates.
''By the time of the (Federal Open Market) Committee's August meeting, the risks had become balanced,'' Greenspan said, and he went on to hint that the central bank could move from a neutral stance to a policy leaning toward a rate cut, if the global crisis' impact becomes more severe.
The Fed's benchmark federal funds rate, the interest that banks charge each other, has been at 5.5 percent since March 1997. That rate determines the borrowing costs that millions of Americans pay on home equity and other loans.
''The Fed is now leaning away from a tightening move, and pointing eventually toward the easing side, depending on how serious this crisis is,'' said David Jones, chief economist at Aubrey G. Lanston & Co. in New York.
Greenspan, who in a famous speech in December 1996 warned of ''irrational exuberance'' overtaking the high-flying U.S. stock market, also sought to calm investors who this week watched the Dow Jones industrial average drop 411 points.
''We have relearned in recent weeks that just as a bull stock market feels unending and secure ... so it can feel when markets contract that recovery is inconceivable,'' Greenspan said. ''Both, of course, are wrong.''
But Greenspan also said securities analysts' recent projected per-share earnings growth of more than 13 percent annually over the next three to five years for U.S. companies ''is unlikely to materialize.''
Greenspan was meeting later Friday with U.S. Treasury Secretary Robert Rubin and Japan's new finance minister to review Japan's efforts to pull itself out of recession.
The economic crisis that began a year ago in Asia has in recent weeks claimed another victim -- Russia, which has seen its economy disintegrate after a botched attempt to devalue the ruble.
And this week, the ripples have reached closer to the United States, as a number of Latin American markets have plunged.
Before the recent market turbulence, many U.S. economists had believed the Federal Reserve was poised to raise interest rates soon, because of worries that low unemployment was putting upward pressure on wages and thus could cause inflation.
But for the first six months this year, the consumer price index has risen at an annual rate of only 1.4 percent and Fed policymakers voted to leave interest rates unchanged at the central bank's most recent meeting on Aug. 18.
The minutes of the July meeting showed that the central bank at that time was still poised to raise short-term interest rates. Officials then saw only a ''very small but growing possibility'' that Asia's problems would trigger a U.S. economic downturn.
As market turbulence intensified in the United States this week, a growing number of economists had suggested that the Federal Reserve would soon ride to the rescue by cutting U.S. interest rates.
Lower interest rates generally boost an economy's prospects for growth by making it cheaper for businesses and consumers to borrow.
Lower U.S. interest rates also could boost the global economy by improving U.S. growth prospects and also lowering the value of the dollar in relation to other countries' currencies. The would make it easier for foreigners to purchase American-made products and services.
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