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Pastimes : The Naked Truth - Big Kahuna a Myth -- Ignore unavailable to you. Want to Upgrade?

To: John Pitera who wrote (20678)	2/21/1999 8:52:00 AM
From: MythMan	Read Replies (1) \| Respond to of 86076

February 21, 1999 ECONOMIC VIEW A Speech We'll Never Hear From Alan Greenspan By RICHARD W. STEVENSON ASHINGTON -- (italics)Despite his reputation for deliberate opacity, Alan Greenspan, the Federal Reserve chairman, actually speaks quite directly about the outlook for the economy and interest rates. Still, there may be limits to any Fed chairman's forthrightness. Rest assured that when he goes before the Senate Banking Committee on Tuesday for the first round of this year's Humphrey-Hawkins testimony, he will not say the following, no matter how much he might want to.(end italics) Thank you. I always enjoy this opportunity to indulge members of Congress in the fantasy that they understand monetary policy, and to prepare Wall Street for the next trick up my sleeve. Let's start by reviewing 1998. You might remember me saying in September that no nation could remain an oasis of prosperity unaffected by what was going on in the rest of the world. Boy, was I wrong! Japan remains in the tank, and the rest of Asia is only starting to breathe on its own. Emerging economies from Russia to Brazil are already in free fall or teetering on the brink. Europe is doing nothing to help, and may itself be headed for a downward slide. Yet the American economy is not only shrugging off the rest of the world's woes, it is also showing remarkable strength. The economic growth rate in the fourth quarter -- 5.6 percent, annualized -- may wind up being revised downward somewhat. But heading into 1999 the United States was not just an oasis, it was a veritable economic Garden of Eden. Speaking of sin, I'll confess to my own. That last interest rate cut -- the quarter-point reduction in the federal funds and discount rates in November -- was a mistake. The economy certainly didn't need it. And while I'm sure my central-banker friends around the world appreciated it, its main effect at home was to send stocks higher. I really should have held off, keeping that quarter point in my ammo belt just in case Brazil melts down or some other conflagration breaks out in the global financial system, and we need another shot of monetary easing. Now, if I have to cut rates further, Wall Street is going to spurt up into cloud-cuckoo-land. Everyone knows my feelings about equity valuations, but let me try this one more time: You people are bonkers if you think earnings are going to hold up over the next year, much less increase at a double-digit pace. So if you're buying on the basis of price-to-earnings multiples, stop deluding yourselves -- you're all day traders now. Since we central bankers have to consider all the possibilities, let's look at another: that growth remains so strong this year that the hawks start agitating for a rate increase to head off any chance of inflation taking root. Raising rates now, while there are no signs of inflation to speak of, would bring the wrath of the business establishment down on me and make the Fed a political issue heading into the 2000 election. I'm willing to take the heat for a tough call if necessary. But we might have been able to avoid the need for tighter policy if we had just stayed pat last fall after the first two quarter-point rate cuts, which left the Fed funds target rate at 5 percent. Then there is the question of how investors would respond to even a small rate increase. One thing I've learned is that it is impossible to let the air out of a stock market bubble slowly. When this thing goes, it could well explode with a bang that will hit the real economy hard. Who knows? Even a small rate increase at the wrong time could set off a chain reaction that we would regret deeply. Clearly, that's one reason you are all listening so attentively for any sign that we see a need for tightening later this year. The monetarists on the Open Market Committee are already pressing for us to adopt a tightening bias, and with some justification. The Phillips Curve crowd, led by Larry Meyer, keeps asking how long our streak of good luck on inflation will last, and they have a point. There has to come a day when all the world's economic winds will not chance to blow our way at the same time. Oil prices will not remain depressed forever. The dollar could weaken, or global demand could recover; either would drive up the prices we pay for imported goods. And eventually it will dawn on workers that they now have the upper hand and can demand higher pay. Even I don't think we can sustain a 4 percent annual growth rate and a 4.3 percent unemployment rate forever without seeing wages and prices start creeping higher. But this economy has proved remarkably resilient, and I am inclined to bet that we can make it at least until summer without a compelling need for a rate increase. No guarantees, now -- the potential for surprises, both happy and nasty, is too great. But with inflation virtually nonexistent, we've got an opportunity to be patient, and plenty of time to react if wage and price pressures start to build. So until things break one way or the other, we're on hold. Any questions?