Fed Chairman Soothes Investors Greenspan Changes Tune, Says Stocks May Not Be Overvalued

Federal Reserve Chairman Alan Greenspan defended his recent cautionary comments about the stock market’s record climb, arguing that the Fed has to worry about a lot of factors that could harm the U.S. economy.

Greenspan, who fretted last week about “excessive optimism” among investors and in December jolted markets globally with his comments about “irrational exuberance,” insisted Wednesday that he is not trying to jawbone stock prices and couldn’t do so even if he wanted to.

“We have a very complex international market system with millions of players in the game,” Greenspan said. “There is no way you can talk down or talk up prices or interest rates.”

In appearances Wednesday before the National Association of Business Economists and a House Banking subcommittee, Greenspan sought to answer complaints from critics that he was improperly meddling in market activities with his comments.

He said that his remarks were not an attempt to influence stock prices, but rather to signal that in performing its job of controlling inflation, the Fed must be concerned about rapid price increases not only in goods and services but also in financial assets such as stocks and bonds.

Greenspan said that rising stock prices were among a number of factors the Fed watches to determine whether inflation is becoming a threat.

In testimony last week before the Senate Banking Committee, Greenspan had cautioned that rapidly rising prices for stocks and bonds can contribute to overall inflationary pressures and that speculative bubbles always burst.

He said that investors, many of whom have experienced only the market’s remarkable rise in the 1990s, may not be prepared for a period of falling prices and therefore may not be demanding enough of a risk premium in their investment purchases.

In his comments Wednesday, however, Greenspan stressed that stock prices may not be overvalued as long as forecasts about continued increases in company profit margins turn out to be accurate.