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To: wmwmw who wrote (13420)	5/10/1999 2:08:00 PM
From: Les H	Read Replies (1) \| Respond to of 99985

Greenspan Hints at Possible Need to Tighten Down the Road Bank of Montreal bmo.com May 6, 1999 Fed Chairman Greenspan's speech today leaned slightly toward the need for higher interest rates, though a move is probably not imminent. The speech suggests that the Fed will probably not tighten nor shift its bias toward tightening at the May 18 policy meeting, but could move later in the year. It is consistent with Bank of Montreal's forecast. Greenspan mentioned that one imbalance in the economy, tight labour markets, poses an upside risk to the inflation outlook. He countered this slightly by saying that the lofty stock market also poses a downside risk to the economic expansion if it corrects. However, more emphasis was placed on the former risk than the latter. Greenspan dumped a pail of cold water on those analysts who believe the US economy has entered a "new era" of sustainable strong growth, tight labour markets and low inflation. While admitting that the economy has undergone a structural shift because of a likely permanent upward rise in productivity growth, he also noted that the economy still operates within limits. The labour market can not keep tightening without fueling wage inflation. Productivity growth can not rise indefinitely to contain unit labour costs and "it can not have changed the law of supply and demand." At some point, if the economy continues to grow faster than its long-run potential, excess demand pressures will cause price pressures to intensify. While hinting that the next move in rates is more likely to be up than down, Greenspan did not suggest any urgency to tighten. He appears content not to make a pre-emptive strike on inflation, but rather to wait for signs of rising inflationary pressures. He did not talk about the possible need to reverse last fall's easing moves. Greenspan is probably still worried about the potential for higher US rates to derail Asia's economic recovery, which he said is still "fragile."

To: wmwmw who wrote (13420)	5/10/1999 3:06:00 PM
From: pater tenebrarum	Read Replies (3) \| Respond to of 99985

Wang Wei, granted that many people, including a bunch of prominent economists, seem to think that crude oil prices somehow don't count with regards to inflation prospects. i happen to think otherwise. since crude is a very large import item, it's rising price puts pressure on the trade balance, which in turn pressures the dollar, and that puts pressure on the import component of inflation. in addition to that, money supply has been growing like weeds lately and the printing of money as far as i know tends to lead to a decline in it's value, otherwise known as inflation. i believe that AG's speech has made clear that he doesn't believe that the laws of supply and demand have been suspended somehow. didn't he mention that he heard it all before, referring to 'new era' talk? the long period of disinflation naturally has conditioned everyone into believing that inflation is dead forever. that's probably a dangerous delusion; history is replete with examples of such popular misconceptions. the very moment a vast majority of 'experts' widely accepts a certain state of affairs it is usually time to look for things to change. i also take issue with your statement that we are not in the 'greater fool' stage in this market. i think that is precisely where we are. this is not to say that this blissful state of affairs may not carry on for a while yet. i just think it's useful to be aware that there's a certain reality disconnect associated with the market's valuation. to quote barton biggs: 'the fools are dancing'. regards, hb