Greenspan speaks:
Thu, 22 Jul 1999, 11:19am EDT
Greenspan Says U.S. Economy May Be Growing Too Fast, May Prompt Rate Rise
By Michael McKee
Greenspan Says U.S. Economy May Be Expanding at Too-Fast Rate
Washington, July 22 (Bloomberg) -- The U.S. economy may be
growing too quickly and could force the Federal Reserve to raise
interest rates again if there are signs inflation is likely to
accelerate, Fed Chairman Alan Greenspan said.
Unless job creation slows and productivity increases
continue to accelerate, the Fed is poised to act preemptively to
raise interest rates before inflation picks up, Greenspan said in
the text of his twice-yearly Humphrey-Hawkins testimony on the
economy and Fed policy.
''If new data suggest it is likely that the pace of cost and
price increases will be picking up, the Federal Reserve will have
to act promptly and forcefully so as to preclude imbalances from
arising that would only require a more disruptive adjustment
later,'' he told the House Banking Committee.
Greenspan didn't specifically signal that the Fed would
raise the overnight bank loan rate at its next meeting on Aug.
24. Still, the tone of his 16-page prepared text included more
warnings than many analysts were expecting about the need to
follow a June quarter-point increase with another ''preemptive''
attack on inflation. He also warned of a possible ''euphoric''
rise in stocks fueling increased consumer spending.
''When we can be preemptive, we should be,'' he said.
Employment growth has exceeded the growth of the working-age
population by almost half a percentage point this past year,
which ''implies that real GDP is growing faster than its
potential,'' Greenspan said. The Fed's official forecast is for a
3.5 percent to 3.75 percent growth rate, little changed from
1998's 3.9 percent expansion.
If unemployment falls any further than the 4.2 percent to
4.3 percent rage of recent months, that would be ''one indication
that inflation risks were rising,'' Greenspan said.
''There can be little doubt that, if the pool of job seekers
shrinks sufficiently, upward pressures on wage costs are
inevitable,'' he said. ''Such cost increases have invariably
presaged rising inflation in that past, and presumably would in
the future, which would threaten the economic expansion.''
So far, ''increasingly evident'' increases in productivity
growth are holding down inflationary pressures, Greenspan said.
After languishing at about 1 percent in the 1970s and 1980s,
productivity growth has been above 2 percent the past three
years. Over the past four quarters it's increased 2.8 percent,
and could reach 3.5 percent if second quarter growth comes in
close to 4 percent, he said.
That has enabled out put to grow ''beyond what normally
would have been expected,'' he said, in high technology
industries as well as ''steel, textiles and other stalwarts of an
earlier age.''
Companies have taken advantage of the computer revolution to
eliminate redundancies in inventories, workers and capital
equipment, saving money at a time when global competition has
made it difficult to raise prices.
He warned, however, that ''history counsels us to be quite
modest about our ability to project the future path'' of
productivity increases. In addition, he said productivity must
continue to increase at an ever-faster pace to keep inflation
from accelerating. ''Should the increments of gains in technology
that have fostered productivity slow, any extant pressures in the
labor market should ultimately show through to product prices,''
Greenspan said.
The end of the global economic slowdown also raises
inflation risks, Greenspan said. ''Improving global prospects
also mean that the U.S. economy will no longer be experiencing
declines in basic commodity and import prices that held down
inflation in recent years,'' he said.
The price for crude oil -- used to make everything from
gasoline to plastic bags -- is up 57 percent this year. Crude oil
closed above $20 a barrel last week for the first time since
November 1997.
The rapid increase in productivity, Greenspan said, doesn't
necessarily mean stocks aren't overvalued. Rising productivity
does mean lower costs, likely increasing business profits, he
said.
''The danger is that in these circumstances, an unwarranted,
perhaps euphoric, extension of recent developments can drive
equity prices to levels that are unsupportable,'' he said. ''Such
straying above fundamentals could create problems for our economy
when the inevitable adjustment occurs.''
There are signs the economy could slow if stock markets
don't continue ''outsized'' gains, consumer spending could ease,
and business investment fall back, Greenspan said. Still, with
''large unexploited long-term profit opportunities'' available
from low inflation and the growth of technology, ''the typical
cyclical retrenchment could be muted,'' he said.
Fed policy-makers have been counting on a slowing of growth
from the near 4 percent pace of the past few years to keep
inflation in check and sustain the expansion, now the longest in
peacetime. So far, that hasn't happened.
The economy grew at a 4.3 percent annual pace in the first
quarter, and analysts expect second quarter growth won't turn out
to be much slower when it's reported by the Commerce Department
next week.
Given that, the Fed revised higher its prediction for GDP
growth this year. The ''central tendency'' of the new forecast
calls for the economy to grow at a 3.5 percent to 3.75 percent
inflation-adjusted pace this year, Greenspan said. That's up from
the Fed's February estimate of 2.5 percent to 3 percent growth.
The central bank still expects that growth rate will keep
unemployment ''in the range of the past 18 months.'' Currently,
unemployment is 4.3 percent.
The consumer price index will rise no more than 2.5 percent
this year, up from 1998's 1.6 percent increase, according to the
Fed forecast. The inflation forecast reflects Fed policy-makers'
''determination to hold the line on inflation, through policy
actions if necessary,'' Greenspan said.
The Fed's policy-making Open Market Committee boosted the
overnight bank lending rate a quarter-point to 5 percent on June
30. At the same time the central bankers announced they were no
longer predisposed towards another increase anytime soon.
Yet the FOMC statement also noted members were ''especially
alert to the emergence, or potential emergence, of inflationary
forces that could undermine economic growth.''
Greenspan said the FOMC ''did not want to foster the
impression that it was committed in short order to tighten
further.'' Rather, he said, ''it judged that it would need to
evaluate the incoming data for more signs'' that inflation could
be developing.
The FOMC has elected to continue with the money supply
targets it adopted in July 1998, Greenspan said. For all of 1999,
M2 -- the broadest measure of money, including cash, checking
accounts and money market accounts -- should grow 1 to 5 percent,
while M3, which adds time deposits, should grow 2 to 6 percent.
Greenspan's remarks were the first part of the Fed's twice-
yearly outlook report required by the Humphrey-Hawkins Full
Employment and Balanced Growth Act of 1978. Next week, Greenspan
will reprise his testimony to a subcommittee of the Senate
Banking Committee.
This round of Humphrey-Hawkins hearings could be the last.
The provision of law that requires the Fed's testimony expires
this year. There has been no move yet to enact a new reporting
requirement, although Greenspan has said he thinks it's important
for the Fed to do so and House Banking Committee Chairman Jim
Leach, a Republican from Iowa, said he intends to press for a new
law.
''I strong favor it,'' Leach said this week. ''The most
important oversight obligation of any committee of
Congress is oversight of the Federal reserve Board.''
Even if the law isn't changed to require the Humphrey-
Hawkins hearings, Leach said he would still ask Greenspan and his
successors to appear regularly before the committee and discuss
the Fed's outlook for the economy and Fed interest-rate policy. |
