US Fed Chairman on Deflation of Stock Market Bubble

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Last updated at: (Beijing Time) Saturday, August 31, 2002

US Fed Chairman on Deflation of Stock Market Bubble

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US Federal Reserve (Fed) Chairman Alan Greenspan said Friday that Fed policy-makers could not have deflated the stock market bubble without raising interestrates to such high levels that it would have pushed the country into a severe recession.

Addressing to an annual Fed economic symposium held at Jackson Hole, Wyoming, Greenspan defended the Fed against critics who havecontended that the failure to deflate the high-flying stock marketin the late 1990s was a major policy error.

He said even if the Fed felt it should substitute its judgment for the actions of millions of investors, it would be very hard for the Fed to curb the euphoria in stock market.

"The notion that a well-timed incremental tightening could havebeen calibrated to prevent the late 1990s bubble is almost surely an illusion," Greenspan said.

To support that view, Greenspan cited previous instances when the Fed raised interest rates by more than 3 percentage points in the late 1980s and mid-1990s but stock prices resumed their upwardadvance after initial retreating.

He said that to have the impact of deflating an unjustified rise in stock prices, the Fed would have had to push rates up by such large amounts that it would almost inevitably trigger an economic recession, the very outcome the Fed was seeking to prevent.

Greenspan spoke at the start of two days of discussions involving top academic economists and Fed officials, who were examining the topic of how Fed interest rate decisions and budget and tax policies can be used to deal with recessions.

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