Greenspan Says Inflation Fears Lack Substance

Federal Reserve Board Chairman Alan S. Greenspan on Tuesday downplayed fears of a major rekindling of inflation and said the U.S. economy is doing better than many economists had expected.

Greenspan, speaking to the Northeast-Midwest congressional leadership council, also said that the massive U.S. trade deficit appears to be “bottoming out” under the pressure of a long-declining U.S. dollar.

His remarks came on the eve of the release of government statistics on merchandise trade for August.

In July, the most recent month for which the government has figures, the trade imbalance soared to a record $16.5 billion.

Greenspan, noted that the trade figures mask recent improvements in the volume of U.S. exports.

“We’re beginning now to see people shifting their buying patterns from foreign sourcing to domestic sourcing,” he said.

The dollar has declined more than 40% against the Japanese yen, the West German mark and other key currencies since mid-1985. A weaker dollar makes imported goods more expensive at home and U.S. products cheaper abroad.

Data Misleading

Greenspan said recent increases in overall domestic capital investment “looks to be a fairly significant and sustainable trend.”

On inflation, Greenspan said fears in financial markets that inflation may return to the high levels of the late 1970s and early 1980s are “lacking in specific underlying statistical support.”

He suggested that recent increases in long-term interest rates overstate the nation’s underlying rate of inflation. Financial markets are anticipating a degree of inflation that is “probably in the lower probabilities of the outcome,” Greenspan said.

Some analysts had expected the Federal Reserve to move in the near future to further boost interest rates to quell inflationary expectations.

However, Greenspan’s remarks Tuesday appeared calculated to quiet fears of such an imminent move.