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Greenspan Warns About Risks of US Economic Slowdown
US Federal Reserve Chairman Alan Greenspan expressed satisfaction Tuesday, December 5, that the rate of economic growth is slowing to a more sustainable pace, but he warned of the dangers posed to the economy from unexpected shocks.
Speaking to a group of bankers in New York, Greenspan specifically mentioned the sharp plunge in stock prices and the possibility this could cause a cutback in consumer and business spending. He also said rising tensions in the Middle East could cause oil prices to surge unexpectedly.
Greenspan's remarks were the firmest signal yet that the central bank is switching its chief concern from fighting inflation by raising interest rates to worrying that its credit tightening has gone too far and could prompt an outright recession.
"In periods of transition from unsustainable to more modest rates of growth, an economy is obviously at increased risk of untoward events that would be readily absorbed in a period of boom, " Greenspan said.
The Fed raised interest rates six times from June 1999 to May 2000 in an effort to slow the booming economy and keep inflation in check.
Responding to those rate increases, economic growth slowed abruptly to an annual rate of just 2.4 percent in the summer, less than half the sizzling 5.6 percent pace of the spring.
Recently, more economists have begun expressing fears that the central bank has overdone the credit tightening and could be running a danger of ending the current record-long economic expansion.
Talking about the impact that the fall in stock prices could have on the real economy, Greenspan said, "In an economy that already has lost some momentum, one must remain alert to the possibility that greater caution and weakening asset values in financial markets could signal or precipitate an excessive softening in household and business spending."
Despite his concerns, Greenspan stressed that the current situation is not like the turbulence of 1998 when a burgeoning Asian crisis and Russian default on its bonds plunged US and global financial markets into a tailspin. At that time, the Fed responded with three rapid rate cuts to restore calm.
The Fed next meets to discuss interest rates in two weeks. While it is expected to leave key interest rates alone at that time, economists widely believe it will shift its assessment of economic conditions away from concerns about overheating toward a more balanced view of economic risks that would include an acknowledgment of the risks of an excessive slowing. Such a move would open the door to rate cuts sometime next year.
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