09/04 22:58 Greenspan says market turmoil may hurt US economy
(Adds details, recasts) By Greg Frost
BERKELEY, Calif., Sept 4 (Reuters) - Federal Reserve Board Chairman
Alan Greenspan warned on Friday that global financial turmoil and Wall
Street's volatility may hurt the U.S. economy and suggested he was as inclined
to cut interest rates as to raise them.
In his first comment on recent tumbling stock prices, the world's most powerful
central banker said the Fed now saw a balance of risks facing the U.S.
economy between deflationary pressures from international crises and
domestic inflation.
"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," Greenspan
said in a speech at the University of California in Berkeley.
Although he did not directly comment on the bank's interest rate policy,
Greenspan said it was a time to be cautious.
"Clearly, the history of large swings in investor confidence and equity
premiums for rational and other reasons counsels caution in the current
context," he said.
"We have relearned 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," Greenspan said.
"Both, of course, are wrong. But because of the difficulty imagining a turnabout
when such emotions take hold, periods of euphoria or distress tend to feed on
themselves," he added. Greenspan said that in the spring and early summer of
this year Fed policymakers were concerned that the strong U.S. economy
would fuel inflationary price pressures and were thinking about raising rates.
But Asia's economic slowdown has held down prices in the United States
despite robust economic growth.
With wage pressures growing and exports declining, companies have seen
their profits squeezed and analysts have said this was one reason for the recent
stock price tumble.
Greenspan said some profit projections had been unrealistic even with
productivity gains, which lower costs of doing business, continuing at the high
rate of recent years.
"Even if this is indeed the case, and only anecdotal evidence supports it,
security analysts' recent projected per share earnings growth of more than 13
percent annually over the next three to five years is unlikely to materialize," he
said.
The Fed has repeatedly warned that tight labor markets could spill over into
higher wages and prices. Employment data for August released on Friday
showed the economy creating 365,000 jobs and the jobless rate at 4.5
percent.
But Greenspan said the fears had not materialized to date. The Federal Open
Market Committee, the Fed's policymaking arm, saw the risks at its most
recent meeting on Aug. 18 as more balanced between economic slowdown
caused by international events and domestic inflation.
"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," he said.
The Fed appeared earlier this year poised to raise interest rates and as late as
July had maintained that bias. The FOMC next meets on Sept. 29, and a
number of economists are calling for a rate cut to ward off a global recession.
They argued that consumers are likely to curb their purchases as a result of the
sharp drop in stock prices over the last two weeks and Greenspan seemed to
agree.
"As dislocations abroad mount, feeding back on our financial markets, restraint
is likely to intensify," he said.
Calls for a Fed rate cut also have grown internationally.
Brazil's Finance Minister Pedro Malan, in Washington for a meeting of top
Latin American finance ministers, said the United States needed to cut rates to
aid struggling economies.
"In my opinion, the one idea that should be seriously considered at the next
meeting of the U.S. Federal Open Market Committee should be a reduction in
U.S. interest rates. That was my suggestion and that of other ministers," Malan
said at the end of the two-day meeting sponsored by the International
Monetary Fund.
09/05 10:16 Clinton says U.S. economy strong despite turmoil
By Randall Mikkelsen
WASHINGTON, Sept 5 (Reuters) - U.S. President Bill Clinton sought to
calm American economic jitters on Saturday, saying the U.S. economy
remained on the right track despite global financial turmoil that has pummeled
U.S. stocks.
"For all the quicksilver volatility in the world's financial markets, the American
economy is on the right track," Clinton said in his weekly radio address.
"Markets rise and fall. But our economy is the strongest it's been in a
generation, and its fundamentals are sound," he said.
Clinton said, however, that the United States was affected by overseas
financial events and that it was crucial for Congress to help promote stability
by passing funding for the International Monetary Fund.
"The International Monetary Fund is a critical device to get countries to reform
and do the right things, and return to growth. Without it, they won't be able to
buy American exports and we won't be able to do as well as we otherwise
could do," he said.
Clinton recorded his address on Friday while in Ireland.
His comments came as the chairman of the U.S. central bank warned that
global financial turmoil and Wall Street's volatility may hurt the U.S. economy
and suggested he was as inclined to cut interest rates as to raise them.
"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," Federal
Reserve Board Chairman Alan Greenspan said in a speech on Friday at the
University of California in Berkeley.
In his first comment on recent tumbling stock prices, the world's most powerful
central banker said the Fed now saw a balance of risks facing the U.S.
economy between deflationary pressures from international crises and
domestic inflation.
The president cited a report from White House economic adviser Janet Yellen
that noted few signs of serious economic trouble, although the financial crisis in
Asia had slowed exports of U.S. farm products and other goods.
"The economy is healthy and remains largely free of the symptoms that often
presage an economic downturn," Yellen said. "The fundamentals are in place
for continued solid economic growth, though developments in world markets
continue to bear close monitoring."
"A further deterioration in the international economic situation remains the
single largest risk to a forecast of continued solid growth," she said.
Yellen's report said the rate of economic growth was moderating toward "the
solid pace" forecast in the administration's mid-year economic review and the
Blue Chip private survey of economists.
In addition, she said, "Even with the recent slide in the stock market,
household net worth remains high relative to disposable income and businesses
do not appear to be taking on excessive debt."
The Dow Jones Industrial Average closed on Friday at 7,640, 18.4 percent
below the all-time high of 9,368 set July 17. The benchmark index fell 411
points for the week after losing 482 points the previous week.
The administration's economic review forecast a real economic growth rate of
2.9 percent year over year in 1998 and 2.0 percent in 1999, slowing from 3.8
percent in 1997.
The Blue Chip survey for September forecast a 3.4 percent growth rate in
1998 and 2.2 percent for 1999, with the latter figure down 0.1 percentage
point from the August outlook, Blue Chip executive editor Randell Moore
said.
Yellen's report said the growth of consumer purchases was likely to slow
unless the stock market resumed its surge. But she said continued income
growth, boosted by higher employment levels and wages, would continue to
propel gains in consumption.
She said the growth in wages had come with little inflationary pressure.
Clinton also cited a strong August employment report released on Friday,
which showed 365,000 new jobs were added in the month while
unemployment remained at 4.5 percent.
In addition to his call for IMF funding, Clinton urged Congress to maintain
fiscal discipline and reserve any budget surpluses pending reform of the Social
Security retirement system, and said he would work to win passage of
education measures that would assure long-term prosperity.
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