FYI...<<Fed Chief Says New-Age Economy Can Have Old Problems
By RICHARD W. STEVENSON (AP) June 15, 1999
WASHINGTON -- Alan Greenspan, the Federal Reserve chairman, warned Monday that increases in business efficiency could not counterbalance the strains on the economy forever.
Speaking before a congressional committee, Greenspan revisited his favorite theme of the last few years, that huge investments in technology are yielding substantial gains in productivity, or output for every hour worked, a fundamental and far-reaching improvement in the way the economy functions.
But without directly addressing the growing consensus that the central bank will raise interest rates as soon as the end of this month, Greenspan cautioned against counting on technology as a miracle cure for inflation or a rationale for ever-higher stock prices.
"The rate of growth of productivity cannot increase indefinitely," he told the first of three days of hearings held by the Joint Economic Committee on the role of technology in the economy. "While there appears to be considerable expectation in the business community, and possibly Wall Street, that the productivity acceleration has not yet peaked, experience advises caution."
Greenspan has been an advocate of the view that technology has helped improve the economy's ability to grow without inflation, but he has been distancing himself in recent months from the notion of a "new economy" in which inflation is no longer a threat. As he did in a speech last month, he noted Monday that "history is strewn" with miscalculations about technology developments and that policy makers had to be modest about their ability to predict technology's effects.
The tone of his remarks was in line with that of other Fed officials over the last month in making clear that the central bank increasingly sees early signs of problems brewing in an economy that has enjoyed a remarkable run of growth.
But he gave no clear indication of whether the central bank had enough evidence of resurgent inflation to nudge interest rates higher at its next policy meeting, on June 29 and 30. As a result, his comments had little effect in the financial markets.
Economists and investors expect Greenspan to provide a relatively unambiguous signal about his intentions when he testifies about monetary policy before the committee on Thursday, a day after the government releases figures on consumer price inflation in May.
Greenspan was the first witness at the hearings, which the Joint Economic Committee is conducting in part to discuss such issues as tax breaks for research and development and the liability of technology companies for problems involving the Year 2000 software problem. The witnesses include William H. Gates, the chairman of the Microsoft Corp., who will appear on Tuesday.
A warning that inflation can coexist with technology.
But the hearings also seem intended to give the Republican majority in Congress an opportunity to give a sympathetic ear to the technology industry, one of the most important battlegrounds in the fight between the parties for campaign donations, and one that Vice President Al Gore has worked hard to sew up for his presidential race.
In highlighting the Year 2000 liability issue, the Republicans are putting on display the uncomfortable situation the Democrats find themselves in, trapped between their desire to court technology companies that want protection from lawsuits and the Democrats' traditional alliance with lawyers, who want to protect the right of computer users to sue.
Greenspan steered clear of both politics and specific references to monetary policy. He reiterated his belief that technology has been perhaps the dominant force in the economy in recent years, fostering widespread changes in the way businesses operate and contributing tremendously to the vibrancy and durability of the expansion, which is now in its ninth year. But with investors and economists looking for any clues about future rate increases, it was his warning about the limits of technology that was most provocative. >>
----------------------------------------------------------------------Related Article
Computer Age Gains Respect of Economists
(April 14, 1999)
<<Many economists and investors expect the central bank to push its benchmark Federal funds target rate up by a quarter-point, to 5 percent, at the end of the month. Evidence that the economy continues to roar along, including a surge last month in retail sales, has already pushed up the long-term interest rates set by the market in recent weeks, in effect doing some of the Fed's job for it by squeezing sectors of the economy sensitive to interest rates, like housing.
Although a Fed tightening is not certain -- there are still scant signs that inflation has taken root -- the markets are increasingly asking not whether the Fed will move this month but whether the move will be a one-time action or the start of a series of rate increases that would take back all of last fall's easings.
The Fed cut rates three times last fall, in quarter-point increments, to keep the markets stable and the economy humming despite the global financial crisis.
But the financial crisis, which originated in Asia, now seems to be receding. A surprising rebound in economic growth in Japan during the first quarter -- provided it does not turn out to be a statistical fluke -- could prove to be an important turning point. And the fear that gripped the credit markets last fall is all but gone, replaced by more concrete concern that inflation could stage a comeback.
Moreover, as Jack Guynn, the president of the Federal Reserve Bank of Atlanta, put it Monday, the "lucky streak" that the United States has enjoyed on inflation "has finally run out," at least to the degree that price increases have been held down by economic weakness in the rest of the world.
"Energy prices are up substantially from their year-ago levels, and other commodity prices have risen, too," Guynn said in a speech to a business group in Atlanta. "What's happened, of course, is that as the economies of Asia and elsewhere have turned the corner to recovery, global demand has picked up, and so have prices."
Guynn, who is a nonvoting member of the policy-making Federal Open Market Committee, said higher inflation was not inevitable. But he offered a list of issues that worry him, including "the residual stimulus" from last fall's rate cuts; signals that the bond market is increasingly concerned about inflation; rapid growth in the money supply, and the very low unemployment rate, which is 4.2 percent. >>
|
