Greenspan Reconsiders Growth And Inflation? Observers Think Fed Chairman May Believe The Two No Longer Go Hand In Hand

Alan Greenspan, the ethereal chairman of the Federal Reserve Board, has taken delight in his ability to keep financial markets guessing about his intentions.

Some cartoonists have even drawn his likeness, humorously suggesting that certain frowns, hand gestures and other movements are subtle clues about the course of interest rates.

But Greenspan, the nation’s chief central banker, sent out a relatively clear signal earlier this month that he has come around to the possibility that the economy can continue to grow and create jobs without stirring inflation.

In a speech at Stanford University, Greenspan noted the economy has been buffeted by many evolving forces since the inflationary 1970s. And he suggested the winds may be shifting again.

“Most recently, the economy has demonstrated a remarkable confluence of robust growth, high resource utilization and damped inflation,” Greenspan said. “Once again we have been faced with analyzing and reacting to a situation in which incoming data have not readily conformed to historical experience.”

His remarks were consistent with efforts during the last year or so to be more direct about his thinking. Greenspan has attempted to send clearer signals, in part so volatile financial markets will not be shocked by changes in monetary policy.

His now-famous refrain about “irrational exuberance” in December 1996 is a good example.

The Stanford speech was certainly less colorful and received far less attention. But the message was significant and offered a key insight into changes at the Fed that may have profound consequences for the long-term direction of interest rates and the economy.

Many economists think Greenspan may still want to take out an insurance policy against inflation and raise short-term interest rates a quarter point as early as the central bank’s meeting Sept. 30. After that move, the Fed chairman may resist the urge to crank up rates.

“He is leaning in the direction of this new-era analysis. It says that there may have been a permanent upward shift in productivity and our economy can indeed grow at an upward pace with inflation in check,” said David Jones, an economist who follows the Fed on Wall Street.

In changing direction, Greenspan has partially accepted the view of many private economists that the government’s statistical measures of the economy are flawed.

The key indicator that may have been sending misleading signals in this case is the Commerce Department’s measure of productivity gains.

Productivity is simply the amount of output a worker achieves each hour. When employers invest in new technology, improved factories or training, workers should be able to produce more goods and services. Higher productivity rates allow employers to give workers higher wages without raising prices. Everyone benefits.

For a long time, analysts were puzzled that the technology investment boom of the early 1990s was not generating the levels of productivity gains they expected. Economists suspected traditional measures were not recording the gains.

Recently, the Commerce Department confirmed these suspicions. It revised upward its earlier report that productivity rose 0.6 percent in the second quarter to a whopping 2.7 percent gain.

“It is difficult to avoid the conclusion that output per hours has to be rising at a pace significantly in excess of the officially published annual growth rate,” Greenspan said.

With productivity gains coming online, some analysts said, the economy could continue to grow indefinitely.