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To: Glenn D. Rudolph who wrote (35355)	1/18/1999 8:44:00 PM
From: dennis michael patterson	Respond to of 164684

LOL. No problem.

To: Glenn D. Rudolph who wrote (35355)	1/18/1999 10:08:00 PM
From: Glenn D. Rudolph	Read Replies (1) \| Respond to of 164684

January 18, 1999 ------------------------------------------------------------------------ The Outlook WASHINGTON Two years ago, when the Dow Jones Industrial Average was at 6437, Federal Reserve Chairman Alan Greenspan uttered the most memorable phrase of his career: "irrational exuberance." Today, the stock market could easily be described as even more irrational and exuberant, a fact that worries both Mr. Greenspan and his soul mate, Treasury Secretary Robert Rubin. Although obviously dismayed at the return of the global financial crisis last week, both men were quietly relieved that it provided at least a temporary interruption in the stock market's euphoria -- especially since nothing done or said by Messrs. Greenspan or Rubin was blamed. Still, after Friday's rally, the industrial average ended the week at 9340.55, 45% higher than it was when Mr. Greenspan issued his admonition. The stock market looms very large in Fed thinking these days, and for good reason. The Fed had been expecting a weaker -- or at least less robust -- stock market to help slow the economy this year. When the Fed began its round of interest-rate cuts in the fall, the market had slumped. That made it much more likely that the long-predicted slowdown in economic growth would actually occur. Every $100 increase in household stock-market wealth adds between $2 and $4 to consumer spending, according to the conventional economic wisdom. The fatter their portfolios, the more likely consumers are to buy new cars or take vacations. It's not just the money; it's the confidence that a rising stock market produces. When the market is up as much as it has been, that is a lot of spending. And Fed Gov. Roger Ferguson suggested recently that there may be times -- now for instance -- when this wealth effect "is noticeably greater than the 2% to 4% that appears to be the norm." The stock market's rebound from last fall's trough, therefore, makes it less likely that the U.S. economy will turn out to be surprisingly weak this quarter. That's one reason the Fed is sending such strong signals that it doesn't plan any more interest-rate cuts soon. As Fed Gov. Edward Kelley put it last week, the stock market is "the joker in the deck." The Fed can't know what the stock market is going to do. No one can. "You keep your eye on the progress of the entire economy," Mr. Kelley said in an interview. "Right now the stock market is an important variable, but only one of many." But the Fed also has a responsibility to try to preserve financial stability. And Fed officials know they'll have to pick up the pieces if the stock market turns out to be a bubble that bursts. Fed officials insist that they can't know for sure if the stock market has risen to the point at which it is likely to burst, or whether its rise reflects the impressive strength of the U.S. economy and the prospects for a technology-induced era of prosperity and productivity gains. They are right: One only knows it was a bubble after it has burst. Central bankers and sympathetic economists pondered the Fed's responsibility at times like this at a Kansas City Federal Reserve Bank conference in 1997. The consensus was that central bankers can't tell when stock prices are truly out of line. And even if they could, the wisdom of responding is "somewhere between impossible ... and inadvisable," as former Fed Vice Chairman Alan Blinder put it. But with almost any historical comparison suggesting that the stock market is very pricey, Fed officials worry more about this question than they used to, and they're talking about it more in public. In fact, some Fed policy makers argued against cutting interest rates in November precisely because they feared it would boost stock prices. "Many members saw some risk that an easing move at this point might trigger a strong further advance in stock-market prices that would not be justified on the basis of likely future earnings and could therefore lead to a relatively sharp and disruptive market adjustment later," according to a published Fed summary of the meeting, released last month. The Fed cut rates anyhow. As Mr. Greenspan's December 1996 remarks demonstrate, he can move the markets merely by moving his lips. He gets another chance to do so when he testifies on Capitol Hill on Wednesday, though he has been noticeably reluctant to be so quotable when discussing the stock market since the "irrational exuberance" speech. But other Fed officials are being blunt. In more than one interview recently, Fed Vice Chair Alice Rivlin has said: "The stock market is high by any kind of valuation. You have to be extremely optimistic about earnings to justify these stock values." She says she isn't trying to jawbone the market down, and is only repeating what she has been saying for a year and a half. "And it's gotten truer," she says. Hint, hint. --David Wessel ------------------------------------------------------------------------