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Strategies & Market Trends : Sonki's Links List -- Ignore unavailable to you. Want to Upgrade?

To: Sonki who wrote (243)	9/5/1998 5:19:00 AM
From: ANANT	Read Replies (8) \| Respond to of 395

Greenspan Indicates Fed Dropped Bias Toward Tightening at August Meeting Dow Jones Newswires September 4, 1998 Link: interactive.wsj.com WASHINGTON -- Federal Reserve Board Chairman Alan Greenspan all but confirmed that the central bank abandoned its bias toward tightening at its last policy-setting meeting and admonished fellow central bankers to weigh carefully the ramifications of recent financial market turmoil. In a speech Friday at the University of California at Berkeley, Mr. Greenspan suggested that the U.S. can't escape the turmoil and pressures of the international market place See the full text of the remarks by Federal Reserve Board Chairman Alan Greenspan. "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," Mr. Greenspan said. "Developments overseas have contributed to holding down prices and aggregate demand in the United States in the face of strong domestic spending. As dislocations abroad mount, feeding back on our financial markets, restraint is likely to intensify," Mr. Greenspan said. In his most explicit reference to the Federal Open Market Committee's deliberations, Mr. Greenspan indicated that the FOMC abandoned its bias toward tightening at its most recent session. The minutes from that meeting have not yet been made available. "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," Mr. 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." While indicating that pressures on the economy were "balanced," Mr. Greenspan restated the need for vigilance on inflation. "To be sure, labor markets are unusually tight, and we should remain concerned that pressures in these markets could spill over to costs and prices. But to date, they have not. Mr. Greenspan raised several questions about the rationality of assumptions of securities analysts and thereby indirectly questioned the level of stock prices based on such assumptions. "Security analysts' recent projected per share earnings growth of more than 13% over the next three to five years is unlikely to materialize," Mr. Greenspan said. "It would imply an ever increasing share of profit in the national income from a level that is already high by historic standards," Mr. Greenspan said. "Such conditions have led in the past to labor market pressures that thwarted further profit growth." Mr. Greenspan restated a quip in which he chided markets for looking for earnings too far into the future even in an atmosphere of near price stability and reduced threat of inflation. "Current claims on a source of income available 20 or 30 years in the future still have current value. But should claims on the hereafter?" Mr. Greenspan asked. High equity market values relative to income and production also increase potential for economic swings and should give people reason for "caution," Mr. Greenspan said. "Since equity values are demonstrably more variable than incomes, when equity market values become large relative to incomes and GDP, their fluctuations can be expected to affect GDP more than when equity market values are low," Mr. Greenspan said. "Clearly, the history of large swings in investor confidence and equity premiums for rational and other reasons counsels caution in the current context," Mr. Greenspan said. "We have learned 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. Both of course, are wrong," Mr. Greenspan said. Mr. Greenspan said "The immediate cause of the economic breakdown [in Asia] there was an evident pulling back from future commitments" where the emergence of excess worldwide capacity in semiconductors may have been a triggering event. "The process became self-feeding as disengagement from future commitments led to still greater disruption and uncertainty rising risk premiums and discount factors and a sharp fall in production," Mr. Greenspan said. In contrast, expectations played a generally more positive role in the U.S. where "the rise in stock prices also meant a fall in the equity cost of capital that doubtless raised the pace of new capital investment," Mr. Greenspan said. Higher stock prices also reduced the cost of capital. "Coupled with the quickened pace of productivity growth, wage and benefit moderation has kept growth in unit labor costs subdued in the current expansion. this has both damped inflation and allowed profit margins to reach high levels," Mr. Greenspan said. But even virtues can become a vice, Mr. Greenspan noted. Japan has had savings and investment rates far higher than those in the U.S., but its per capita growth potential now "appears to be falling relative to ours." "This phenomenon of over investment is observable even among more sophisticated free market economiesÿ...ÿ.ÿIt is arguable that their hobbled financial system is, at least in part, a contributor to their economies' subnormal performance," he said.

To: Sonki who wrote (243)	9/5/1998 5:31:00 AM
From: ANANT	Respond to of 395

High-Level Talks on Global Crisis End With No Commitment From Japanese Dow Jones Newswires September 5, 1998 SAN FRANCISCO -- A meeting of top U.S. and Japanese officials that President Clinton billed as "profoundly important" to the world economy ended without concrete results Friday as Japan said domestic politics prevent it from quickly jump starting its economy. U.S. Treasury Secretary Robert Rubin met Japanese Finance Minister Kiichi Miyazawa, who said he understood the urgency for banking reforms and a fiscal stimulus in his country. But Mr. Miyazawa made no pledge beyond what Japan has already announced -- that it will take "all possible steps to promote financial stability." Greenspan Indicates Fed Dropped Bias Toward Tightening at August Meeting At a press conference after the meeting, Mr. Rubin said he was hopeful that Japan will act quickly, saying it has shown an inclination in the last few months to cut taxes and rescue troubled banks. But he said a judgment about Japan's commitment to reform can only be made "once Japan acts." But Mr. Miyazawa's response was lukewarm. The Japanese finance minister said that political compromise between Japan's ruling Liberal Democratic Party and opposition parties will be necessary for Japan's banking reforms to be enacted successfully. He didn't offer any concrete schedule for the passage of plans. Mr. Miyazawa said that Japan would ensure the country's major banks don't fail so that the global banking system won't be disrupted. "The Japanese government will use public funds to avoid collapse of a big bank" such as the Long-Term Credit Bank of Japan, Mr. Miyazawa said. Concerning the recent rapid decline of the dollar against the Japanese currency, both Messrs. Miyazawa and Rubin said there was 'no discussion on concrete levels of the dollar/yen rates." Mr. Rubin said the U.S. continues to favor a strong dollar. The U.S. hasn't intervened to prop up the yen since June, when it acted in concert with the Japanese monetary authority. Noting that the financial contagion that began in Thailand last year has spread around the globe, Messrs. Rubin and Miyazawa called on the Group of Seven leading industrial nations to 'pursue appropriate policies to promote sound financial systems and strong, sustainable growth." But neither side called for concerted interest-rate cuts, as was suggested Thursday by Rep. Jim Saxton (R., N.J.), chairman of the Joint Economic Committee in the U.S. Congress. Mr. Rubin said Mr. Miyazawa didn't propose concerted rate cuts, and so the subject wasn't discussed. The U.S., for its part, so far sees no need to change monetary policies that have resulted in a combination of robust growth and low inflation. "In our view the fundamentals of the U.S. economy are solid," Mr. Rubin said. "The key is for the U.S. to continue to follow sound policy." The international financial crisis has slowed U.S. growth, he said, but "the probability of a severe crisis that has major effects on the U.S. is low." Messrs. Rubin and Miyazawa are expected to continue an informal discussion over dinner late Friday, but both U.S. and Japanese officials have said they expect no major outcome. Federal Reserve Chairman Alan Greenspan is scheduled to attend the dinner meeting. ------------------------------------------------