>>>Fed cuts 1/4 point...
It took the Whale a year and one half to shut it down...none of this is a surprise. This is the best quote; ["Greenspan is saying, 'I am not certain I am all done or not all done, but you are making a mistake if you think I am all done,"' Meltzer said.]
We're just on the other side, looking back the other way is all. ie...I'd hardly call the stock market inflationary...
August 28, 1999
New York Times
Stock Market Playing Bigger Role in Inflation Policy, Greenspan Says
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By LOUIS UCHITELLE
JACKSON HOLE, Wyo. -- Alan Greenspan, chairman of the Federal Reserve, said Friday that the booming stock market now plays an increasingly significant role in the Fed's debate over inflation but stopped short of calling the market overvalued.
"We no longer have the luxury to look primarily to the flow of goods and services" when making decisions about interest rates, Greenspan said. In effect, he was labeling what he called the "extraordinary increase in stock prices over the past five years" as one of the major economic forces capable of pushing up the inflation rate.
Traditionally, a run-up in stock prices has been viewed as reflecting a strong economy and profitable companies. The economy drove the market. Now the opposite is more and more the case, Greenspan suggested.
The stock market, in response to Greenspan's remarks, which were delivered at an annual conference on monetary policy issues organized by the Federal Reserve Bank of Kansas City, fell moderately Friday. The Dow Jones industrial average dropped 108.28 points, or nearly 1 percent, closing at 11,090.17 in light trading.
The concern, mildly expressed in the day's trading, appeared to be that if the Fed saw an inflationary force in stock prices, it might raise rates again to slow the economy. Higher rates normally bring down stock prices because they raise the payoff from alternative investments, like Treasury bills.
The spectacular rise on Wall Street in recent years has added considerably to the wealth of millions of families and also to the value of the nation's publicly owned companies. Families and companies have spent -- or borrowed against -- part of the windfall from that gain as well as the increased value of real estate to buy additional goods and services. Their increased spending has helped make the economy boom.
Greenspan's remarks suggest that stock prices have become a more important target in the Fed's manipulation of interest rates. Controlling inflation remains the goal of interest rate changes, and that point was made repeatedly at the conference Friday. But Greenspan signaled that rising stock prices, and to a lesser extent rising real estate prices, must take their places alongside such traditional inflationary forces as tight labor markets, rising wages, shortages of goods and services that develop when demand outstrips supply, and the changing value of the dollar.
Despite the strong economic growth since 1996, inflation has remained unusually mild. The Fed, as a result, has been reluctant to push up interest rates very much -- a reluctance that helps to feed the stock market. If a speculative bubble develops and the market finally crashes or declines sharply, the Fed's position is that it will step in then to minimize the damage by lowering rates and making money easier to borrow. Meanwhile the Fed will view the market as another potentially inflationary force, Greenspan said, but will not attempt to influence the market itself.
During a question-and-answer period, Greenspan elaborated on his speech. He said the Fed would intervenue in financial markets only to correct sharp rises or falls in stock prices that might send shock waves through the rest of the economy. The real issue, he said, is a credit squeeze -- a sudden reluctance of lenders to lend -- whether markets are rising or falling.
"We don't respond to gradually rising or falling asset prices," he said. "We do respond to seizing up."
Some economists attending the conference here saw in Greenspan's speech a sort of addendum to the statement that the Fed issued on Tuesday, when it announced a quarter-point increase in the federal funds rate at which banks lend one another money overnight, raising it to 5.25 percent, and pulling up other short-term interest rates with it.
The interest rate increase plus a similar one in June, the statement said, "should markedly diminish the risk of rising inflation going forward."
The financial markets initially saw in that statement a possible signal that the Fed was probably finished raising interest rates for a while. But for Alan Meltzer, an economist at Carnegie-Mellon Institute, Greenspan's explicit addition Friday of the stock market as an inflationary force might mean more rate increases in the coming months.
"Greenspan is saying, 'I am not certain I am all done or not all done, but you are making a mistake if you think I am all done,"' Meltzer said.
Having identified the booming stock market as a potentially inflationary force, Greenspan said that a lot more research needs to be done to determine why people are willing to make such risky investments and then, turning on a dime, flee them.
"If episodic recurrences of ruptured confidence are integral to the way our economy and our financial markets work now and in the future," he said, "it has significant implications for risk management and, by implication, macroeconomic modeling and monetary policy."
But Greenspan was careful to avoid going as far as he had in the past in worrying about the stock market. In December 1996, he questioned the "irrational exuberance" of investors on Wall Street, causing a brief but sharp sell-off in markets around the world.
This time, he said that while stock prices seem unusually high, he cannot conclude that the market is overvalued. Stock prices, for example, should reflect corporate profits, and Greenspan noted instances in which profits have been both overstated and understated in recent months, with the bottom line being that profits may be understated, thus helping to justify a rising market.
But he added an important caveat.
"It does not seem likely, however, even should all of the appropriate accounting adjustments to earnings be made," he said, "that such adjustments can be the central explanation of the extraordinary increase in stock prices in the past five years."
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Copyright 1999 The New York Times Company
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