Fed Remains on Inflation ‘Alert,’ Greenspan Warns
Federal Reserve Chairman Alan Greenspan signaled Friday night that the Fed is ready to raise interest rates at the first sign of renewed inflation, despite earlier impressions that it may have relaxed its stand.
In a late-evening speech at Stanford University’s Center for Economic Policy, Greenspan recalled that the Fed raised rates in March “to protect against” inflation jeopardizing the economic boom.
With labor markets now tight, he warned, “we need to remain on alert.”
Analysts cautioned that the chairman was not necessarily trying to suggest that a decision to raise interest rates was imminent. The board’s policy-setting Federal Open Market Committee meets again on Sept. 30.
However, they said Greenspan apparently was trying to correct an impression in the financial markets that the central bank had relaxed its vigilance in the face of recent statistics showing continued low inflation.
Wall Street’s impressions that the Fed had relaxed stemmed from a Greenspan appearance before Congress in late July, in which he suggested that the economy might be slowing and no rate hike would be needed soon.
In the weeks since then, however, the slowdown for which policymakers had hoped appears to have eluded them, and Fed-watchers have been predicting that the central bank may raise interest rates in November or December.
Greenspan’s remarks came as the Labor Department said the nation’s unemployment rate remained essentially unchanged in August, but that the economy created fewer jobs, mainly because of the Teamsters strike against United Parcel Service.
The department’s monthly report showed the overall unemployment rate edged up to 4.9% of the work force--essentially unchanged from 4.8% in July--marking the fifth month in a row that it has been at 5% or below.
At the same time, however, the Teamsters strike took a visible toll on the number of new jobs created. Industry payrolls rose by only 49,000 in August, the worst performance since September 1996.
Nevertheless, analysts said the setback was only temporary, and the economy has already begun to bounce back from the two-week-long strike that impeded shipments across the nation.
Analysts estimated that if the walkout had not occurred, job growth in August would have weighed in at just over 200,000--well below the 365,000 new jobs created in June, but still a solid showing.
Economists were divided over whether the economy’s growth rate may be slowing slightly--good news for those who feared that the unusually rapid pace might soon threaten to intensify inflation pressures.
David A. Wyss, economist for DRI/McGraw-Hill, one of the nation’s largest forecasting firms, said that, adjusted for the UPS strike, the job-creation figures still were strong by historical standards.
“We may be slowing down a bit, but we’re slowing down from what has been a very fast pace in the first half of the year,” Wyss said. He noted that output is still growing more rapidly than policymakers would like.
But Bruce Steinberg, chief economist for Merrill Lynch & Co., said fears that the economy may be overheating were misplaced. “Job growth has moderated even more than the headlines indicate,” he said.
Financial markets also gave the statistics a mixed reception.
After rising briefly Friday morning, the Dow Jones industrial average fell by 44.83 points to close at 7,822.41. Yields on 30-year Treasury bonds rose to 6.64%, from 6.61% on Thursday.
Wall Street specialists said traders were worried that there is still enough strength in the economy to prompt the Fed to raise interest rates--possibly by year-end--in an effort to dampen wage pressures.
Analysts predicted that financial markets would react sharply on Monday in the wake of Greenspan’s latest speech, which was delivered after the U.S. markets closed. The markets have been unusually volatile recently.
The employment figures came as the White House forecast that last month’s budget deal with Congress will produce a federal budget surplus of $63 billion in fiscal year 2002--double that estimated by the Congressional Budget Office.
In a midyear review, officials also confirmed that the budget deficit for the current fiscal year, which ends Sept. 30, will be $37 billion--the smallest since 1974 and $90 billion below previous forecasts.
The CBO forecast on Tuesday that the budget surplus in 2002 would be $32 billion, but warned that the current year’s deficit--which it pegged at $34 billion--could deepen to $57 billion next year.
However, both longer-term projections depend on a continued strong economy and the willingness of the White House and Congress to keep federal spending in line--assumptions that some analysts regard as uncertain.
If the budget agreement does hold up, it could produce the first balanced budget since 1969, and only the ninth since World War II. The forecasts envision more surpluses until 2007, when the baby boomers start to retire.
Greenspan’s remarks came in a lengthy address on the difficulty that policymakers are having in assessing the economy’s performance--including whether it is becoming more resistant to renewed inflation.
In earlier speeches, the Fed chairman speculated that the nation may be moving toward a new economic “paradigm” in which the economy will be able to grow more rapidly without setting off a new round of inflation.
On Friday, however, he warned that while the Fed needs to be “open to evidence” of such a change, it “also needs to be cautious” in setting the kind of policy that will protect the economy if such theories prove wrong.
“Supplying excess liquidity to support growth that turns out to have been ephemeral would undermine the very good economic performance we have enjoyed,” he said in a text made available by his office here.
“We raised the federal funds rate [interest on overnight loans among banks] in March to help protect against this latter possibility, and with labor resources currently stretched tight, we need to remain on alert.”
The Fed adopted a similar posture late last year, when policymakers concluded that the threat of new inflation was a real one. Except for a quarter-point rise in March, however, it has eschewed further hikes.
Outside analysts have predicted, however, that the central bank would have to return to its “alert” status now that the economy is going into the second half of the year without the slowdown that was forecast.
Although few forecasters believe that the Fed will raise rates at its Sept. 30 meeting, there is a growing consensus that it will order another modest hike in November and possibly again in December.
The August job figures marked the 15th month that the unemployment rate has been near or below the 5.3% mark that economists often cite as “full employment”--the point beyond which inflation pressures intensify.
The 4.8% rate recorded in July had marked a 24-year low.
Moreover, despite persisting fears--and tight labor markets across the country--recent statistics have shown that inflation still is in check, with little real evidence that either wage or price increases are accelerating.
The White House welcomed the new figures. Janet Yellen, head of the president’s Council of Economic Advisors, predicted that the economy would “continue to create jobs and opportunities” in coming months.
The Teamsters strike against UPS took a double toll on the economy. By itself, the 15-day walkout kept 185,000 UPS workers off the job. It also interrupted other businesses, causing a ripple effect.
But Katharine G. Abraham, the commissioner of labor statistics, said those losses were offset by the fact that other shipping companies hired more workers to help them meet the increased demand for parcel deliveries.
As a result, she said, the net impact of the strike cost the economy only about 155,000 jobs, and even that was quickly offset when the Teamsters strike was settled on Aug. 19.
The UPS walkout depressed the August figures on the number of payroll jobs in the economy because workers who are on strike are not counted as employed. Had there not been a strike, job growth would have hit 200,000.
The overall unemployment rate, however, is based on a survey of households and was not affected by the walkout. Respondents who say they are on strike are counted as having a job.
Along with the other figures, Friday’s report showed continued gains among groups that traditionally have had high unemployment rates.
The jobless rate for blacks, for example, edged down to a 23-year-low of 9.3% in August, down from 9.4% in July and 10.4% in June. The rate for Latinos fell to 7.2% in August, down from 7.9% in July and 7.6% in June.
In one possible setback, the report showed that the average hourly earnings of rank-and-file production workers--a key indicator of wage hikes--rose by 0.4% in August, following a scant 0.1% increase in July.
However, analysts were divided over the implications of the pickup for the overall inflation picture.
