Greenspan Calls Economic Outlook Bright; Markets Up
Federal Reserve Board Chairman Alan Greenspan, in a strikingly optimistic mood, declared Wednesday that the outlook for the economy “is as bright as it has been in decades.”
His comments came as financial markets calmed after Tuesday’s declines, with stocks and bonds recouping some of their losses and the dollar rebounding in value against foreign currencies. Treasury Secretary Lloyd Bentsen said that the United States and its industrial partners were prepared to intervene to support the dollar, if necessary.
The dollar’s value closed in New York on Wednesday at 100.85 yen, compared to a Tuesday close of 100.35. The Dow Jones industrial average gained 16.80. Bond prices rose, too, driving down the interest rate for the key 30-year Treasury bond to 7.4%, from 7.49%.
Despite this week’s market turmoil, which had seen the dollar fall on Tuesday to its lowest level against the Japanese yen since World War II, Greenspan offered a resolutely upbeat review of the economy. “Economic activity has strengthened, unemployment is down and price trends have remained subdued,” he told a meeting of the House Budget Committee.
Greenspan’s cheerful rhetoric was unusual because the central bank chief usually cloaks his comments in tones of neutral obscurity. Against a background of widespread talk of possible additional rate hikes, he was implicitly defending Fed actions this winter and spring as adequate to head off any resurgence of inflation.
Many analysts have been saying that markets are jittery because investors expect another boost in interest rates by the Fed, which already has raised rates four times this year. But the thrust of Greenspan’s remarks was that the Fed has done its job.
Prices of some raw materials are rising. But because wages are increasing so slowly, there are no significant changes in the prices for finished goods, Greenspan said. And business is boosting its spending to expand production, a step that has the double benefit of adding jobs and improving efficiency at U.S. corporations.
“Today, we are in the midst of a capital spending boom, as companies strive to modernize existing plants and add capacity,” the Fed chairman said. Spending for computers and high-tech communications devices “has been particularly strong, stimulated by waves of technological improvement and rapidly expanding opportunities for the application of these technologies,” Greenspan added.
With new equipment, business can enjoy increased productivity--a greater value of output by each worker--generating more wealth for the economy without driving up prices.
The Fed chairman said long-term interest rates are “higher than they should be,” because of the sometimes unwarranted nervousness of investors. “There remains a significant inflation premium, embodied in long-term interest rates, reflecting a still-skeptical world financial market view that American fiscal and monetary policies retain some inflation bias,” Greenspan said.
He refused to discuss the volatile performance of the dollar against foreign currencies, other than to tell the committee that he and Bentsen “have been following developments closely.” Later in the day, Bentsen issued a statement saying that the United States, in concert with the other G-7 industrial powers, “continues to be prepared to act as appropriate,” holding open the possibility of steps to buy dollars to strengthen the currency.
But the dollar’s rebound Wednesday apparently took place without any concerted action by governments.
President Clinton, speaking briefly at a White House photo session with King Hussein of Jordan, said that the financial markets eventually would be calmed by the underlying soundness of the U.S. recovery. “I think we just have to keep working on our fundamentals and know that in the end that the markets will have to respond to the . . . realities of the American economy,” Clinton said.
Greenspan said the Fed’s maneuvers to hike interest rates, starting in February, were vital to temper the economy’s expansion and prevent a future resurgence of inflation. If short-term rates had remained low, Greenspan said, “we would have engendered a degree of inflationary instability destructive of jobs.”
Despite higher rates, the economic expansion continues, the Fed reported Wednesday in the latest issue of its “beige book,” a nationwide survey of the business climate.
Manufacturing shows strength in most regions, and home sales “continued at a strong pace,” the Fed reported.
In California, suffering through a long and persistent recession, “economic conditions are reported to be improving slowly,” according to the report. “Manufacturing activity still is mixed, as weakness is reported in the aerospace industry while improvement is expected by some Silicon Valley firms.”
Residential construction, according to the Fed, is “reported flat in Northern California, improving in Southern California, and down from earlier levels in the Central Valley.”
During the Budget Committee hearings, Democrats were pleased and Republicans irked as Greenspan declared that the Clinton Administration budget package adopted last year was successful in helping reduce the deficit.
Greenspan also said, to the enthusiasm of Democrats and dismay of Republicans, that the increases in personal tax rates for higher-income Americans had no short-term damaging impact on the economy.
Rep. Christopher Cox (R-Newport Beach) accused Greenspan of steering Fed policy “hand-in-glove with the Clinton Administration.”
The Fed decision-making process “whether it produces lower rates or higher rates at any given time must be seen as an integral part of the Clinton game plan,” Cox said. “It could even be argued that the Federal Reserve’s independence has been compromised.”
Greenspan responded by insisting that the Fed must work in consultation with the White House while retaining its independence.
“There should be a coordinated policy between the executive branch and the central bank because there is one economy,” Greenspan said. “It is an art form, not a science. I am very well satisfied (with) the way it has worked out between myself and the secretary of the Treasury.”
* WORLDWIDE IMPACT: How weak dollar affects tourists and consumers. D1, D4
* MARKET RESULTS: Dollar, stocks, bonds rally. D2
