Greenspan Hints That a Rate Cut Isn't Unthinkable
By DAVID E. SANGER with RICHARD W. STEVENSON
SAN FRANCISCO -- Alan Greenspan, the Federal Reserve chairman, signaled Friday that the central bank is now less concerned about inflation as a threat to the U.S. economy but is increasingly wary that the spreading global financial crisis could harm the United States.
Greenspan's comments at the University of California at Berkeley came just minutes before Treasury Secretary Robert Rubin met here with Japan's new finance minister, Kiichi Miyazawa, to hammer home the message that the best hope of halting the international crisis lies in quick action by Tokyo to stimulate its economy and shore up its financial system.
But with market volatility having spread to Latin America and with Russia veering toward economic collapse, U.S. officials said they feared that it would be increasingly difficult to contain the turmoil.
At the end of a week in which Wall Street experienced a sharp sell off, Greenspan said that even the United States was increasingly vulnerable. "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," he said.
Greenspan stopped well short of suggesting that the Federal Reserve will cut interest rates, a step being urged on him by a growing chorus of economists and officials in other countries. An interest-rate reduction in the United States would help reduce borrowing costs around the world and could be a powerful psychological boost to embattled investors at home and abroad.
But Greenspan's comments were a marked departure from his last major policy statement, in July, when he told Congress that the risks of inflation outweighed the possibility that the global financial turmoil could push the otherwise strong U.S. economy into recession. And in explaining the change in his speech on Friday, Greenspan seemed to open the door to consideration of an interest rate cut if the global financial situation continues to deteriorate or if the U.S. economy shows signs of stalling.
The global turmoil that has robbed countries of prosperity and growth has benefited the United States so far by helping to dampen inflation and slow down an economy that was at risk of overheating, Greenspan said in his speech Friday night. The downward pressure on inflation is likely to intensify as the turmoil in other nations mounts, a development that he said led Federal Reserve policy-makers to rethink their strategy at their last meeting on Aug. 18.
"In the spring and early summer, the Federal Open Market Committee was concerned that a rise in inflation was the primary threat to the continued expansion of the economy," Greenspan said. "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."
Greenspan, who always leaves himself an out when he makes public pronouncements, went on to indicate that the central bank will not rush into a decision about reducing rates just because of the sharp fall in stock prices this week.
"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," he 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."
Greenspan was to join Rubin after his speech in meeting with Miyazawa.
Earlier this week in Moscow, President Clinton termed Friday's meeting with Miyazawa, who served as Japan's prime minister for two years until a surprise fracturing of the ruling Liberal Democratic Party in 1993, as "profoundly important." That statement reflected a growing view in the administration that the best hope of choking off the 14-month old Asian crisis is to bring about a long-overdue turnaround in Japan.
But Treasury officials winced at Clinton's characterization because they fear that Japan is still weeks or months away from decisive action, at a time that markets are fraying around the world.
All the early indications from Tokyo were that Miyazawa was arriving in San Francisco with few new ideas, no new plans and only vague promises.
"This meeting was never designed or intended to address the question of a plan," Rubin said Friday on a flight to San Francisco. "We'll be extremely interested in Miyazawa's discussion of the banking system and fiscal policy."
The main reason Rubin and his aides were seeking to play down expectations was their fear that the world's jittery markets could react badly to news of little progress from the meeting. But it is also in part because Rubin and Summers have relatively little leverage: Their explicit criticisms of Japan in recent months have created a backlash in Tokyo, and the Japanese Parliament is spinning its wheels as the ruling and opposition parties argue with each other over what to do about the insolvency of some of the world's largest banks.
"I don't think we will propose anything new," a senior Japanese official said before the meeting. "It is just that for the first time we have a finance minister who can explain what our government is doing."
The official was referring to Miyazawa's greatest attribute as an international diplomat: He speaks fluent English, learned during extensive travels in the United States before World War II, and for half a century he has been cast into crisis situations and negotiations with the United States.
But in this case, he has relatively little to work with. Japan's Parliament has been talking for months about passing legislation that would address the country's deepening banking crisis. But the debate has just begun, and it has been bogged down by the question of whether billions of dollars in public funds should be used to bail out banks that were so wildly mismanaged that they now have upwards of a trillion dollars in bad loans on their books.
The test case is how the government deals with the Long-Term Credit Bank of Japan, or LTCB, one of the country's largest financial institutions. There is movement in Tokyo toward steps that would essentially nationalize the bank, using taxpayer dollars to rebuild its capital. U.S. officials clearly fear, however, that Japan is not ready to accept the pain of closing the weakest institutions -- and will further delay resolving the bad debts that are freezing the Japanese economy.
Saturday, September 5, 1998
Copyright 1998 The New York Times |
