Fed Chief Unable To Calm Skittish Markets

For the second time in less than a week, Federal Reserve Chairman Alan Greenspan’s testimony to Congress led jittery financial markets to conclude the central bank wasn’t planning an immediate increase in interest rates.

His message, delivered Tuesday to the House Banking Committee five days after his appearance before the panel’s Senate counterpart, contributed to a bond market rally.

But it wasn’t enough to help the stock market, where the Dow Jones industrial average fell 44 points as technology shares declined for the third straight session.

“Chairman Greenspan was very careful last Thursday and also today to avoid saying anything that would be upsetting to markets,” said economist Allen Sinai of Lehman Brothers.

After Greenspan’s Senate testimony last Thursday, the Dow rose 87 points. To the House, he repeated his prediction that the economy will slow in the second half of the year to a level that doesn’t presage increasing inflation. But he again noted that the slowdown hasn’t occurred.

Business inventories are lean, implying a possible increase in manufacturing activity ahead, Greenspan said. On the other hand, consumers’ debt is high and their appetite for buying new goods waning.

“We’re watching these carefully to see how the economy evolves,” he said. “It’s never simple.”

He said there have been signs of tightness in regional labor markets for at least a year, both for highskilled and low-skilled jobs, but inflationary strains haven’t emerged as a result.

“We are not in distress, or not enough in distress, to be concerned about it,” he said.

Greenspan also sought to offer reassurance about the stock market’s gyrations, saying it’s not surprising that technology stock prices would swing considerably.

“We know a lot of these companies in five years won’t exist. They will have just blown it, they’re gone. But they may turn into a Microsoft,” he said. “The range of potential possibilities is huge.”

Greenspan’s testimony last week and Tuesday were taken by analysts as indicating the Fed would not immediately boost short-term interest rates but at the same time wasn’t ruling out an increase if later economic developments justified it.

“The chairman’s comments … were artful in indicating there’s no panic or abrupt hike in rates coming but that the central bank would move in a deliberate way” if the Fed’s forecast doesn’t prove accurate, Sinai said.

Fed policy-makers are next scheduled to consider changes in interest rates on Aug. 20 at the policy-setting meeting of the Federal Open Market Committee, one of eight each year.

Over the past several years, the Fed has changed rates only on FOMC meeting days. But, in response to a question, Greenspan said “there’s nothing sacrosanct” about that and the Fed would move between meetings if conditions warranted.

He also sought to play down speculation that a new theory - called “opportunistic disinflation” - was influencing the Fed to refrain from increasing interest rates.

The theory, outlined in a Fed staff paper, holds that the Fed “when inflation is low … should not take deliberate anti-inflation action but rather should wait for external circumstances - such as … unforeseen recessions - to deliver the desired reduction in inflation.”

He said the theory was “not an official policy” and that Fed policymakers held “all sorts of views” on it.

On other topics, Greenspan said:

For the first time in recent years the divergence between wages for high school and college graduates isn’t widening. That, he said, was “the first good sign to suggest” that the growth in the gap between the well-off and the poor was “slowing down and hopefully coming to a halt.”

There’s no question that an increase in the minimum wage would be inflationary but most analysts believe the impact would be “relatively small.”