Greenspan Address Will Include Warning
WASHINGTON (Reuters) - A bonanza of good economic news should lift the tone of a key
address this week by Federal Reserve Chairman Alan Greenspan, but he also will warn that
dangers may lurk for a booming U.S. economy that has defied all expectations of a slowdown.
In closely watched testimony on Capitol Hill Tuesday and Wednesday, Greenspan likely will be
vague about the near-term direction of U.S. interest rates. But analysts said that in a subtle
manner, he may raise the possibility of a Fed increase in rates later this year if the economy starts
to show signs of overheating.
Such comments surely will be tempered by reminders from Greenspan that a still-raging global
crisis could well severely harm the domestic economy even though it has not made much of a
dent so far.
''On the one hand, he will point out that the strong economy and tight labor markets present
potential inflation risks against which we must guard,'' said Allen Sinai, president of Primark
Decision Economics in Boston. ''On the other hand, there is a troubled world economy that could
hurt our economy.''
Sinai added, ''From a monetary policy point of view, the picture should be one of a Federal
Reserve on hold.''
With more than a month to go before the Fed's next meeting to discuss interest rates on March
30, Greenspan will appear before the House and Senate banking committees to deliver his
twice-yearly report on the economy and interest rates.
The latest ''Humphrey-Hawkins'' testimony, named after the authors of a 1978 law setting out the
Fed's mandate, comes after the chairman of the Senate Banking Committee, Phil Gramm, has
suggested ending the two-decade-old practice of the reports, which he said take up too much of
his panel's time.
However, because his counterpart in the House of Representatives strongly endorsed
continuing the tradition that remains popular with many other lawmakers, the reports appear likely
to live on for a while.
For their part, investors, always a rapt audience for the semi-annual testimony, will pay close
attention this time to concerns Greenspan may cite about excessive economic strength.
Financial markets will be sensitive to any changes in tone from Greenspan's testimony to the
House Ways and Means Committee on Jan. 20, the last time he spoke in detail about the
economy. Then, he described the U.S. economy as ''sparkling'' but also talked of possible
spillover from the global crisis and also obliquely referred to some risks from the high stock market.
''I think he's going to be a bit more hawkish than he was on Jan. 20,'' said former Fed governor
Lyle Gramley, now a consultant to the Mortgage Bankers Association. ''I do think the Fed is
anticipating an upturn in inflation this year.
The Fed, which trimmed interest rates three times in late 1998, has been preoccupied for much of
the last six months about the risks to the U.S. economy from a year-and-a-half-old crisis that has
wreaked havoc from Asia to Russia to Brazil and other Latin American countries. As export
markets dry up around the world, even some key Western European economies are starting to
flag.
Greenspan has repeatedly said the United States could not remain ''an oasis of prosperity'' amid
such problems.
But recently he conceded there was no sign of a U.S. economic slowing a fact that has befuddled
Fed officials and scores of private economists.
Even as the Fed was hitting the gas pedal on the economy through lower interest rates, gross
domestic product zoomed ahead at a rate of 5.6 percent in the fourth quarter. That was a mere
extension of a three-year period of very robust growth.
But few economists expected the Fed to move to take back any of last year's interest rate cuts any
time soon.
For one thing, inflation is running at a minuscule 1.7 percent annually.
Beyond that, Sinai said the risks to the fragile global economy of higher U.S. rates, which would
tend to draw capital out of other countries and into the United States, are too great. ''We've
learned through all this that the world economy can't take the U.S. economy down, but the United
States can certainly take the world economy down.'' |
