Greenspan Sees ‘Storm Clouds’ Inflation Drops To Zero, But Fed Chief Says Asian Crisis Remains A Big Concern

Inflation is zero and the economy is still humming.

But Federal Reserve Chairman Alan Greenspan warns Congress that “storm clouds” out of Asia make the future highly uncertain.

While describing the economy’s current combination of low inflation and high job growth as an “exemplary performance,” Greenspan said Tuesday that the Asian crisis was forcing the Fed to navigate in uncharted waters with large doubts over how events will unfold.

“The key question going forward is whether the restraint building from the turmoil in Asia will be sufficient to check inflationary tendencies that might otherwise result from the strength of domestic spending and tightening labor markets,” Greenspan told a House Banking subcommittee.

If the Asian currency crisis depresses the U.S. economy more than currently expected, the Fed might have to cut interest rates, Greenspan said. But if U.S. demand remains strong and inflationary pressures start bubbling up, then the central bank will be prepared to raise rates, he said.

Many economists said Greenspan’s comments Tuesday in delivering his semi-annual monetary report to Congress supported their belief that the Fed is going to remain on hold through the first half of this year at least.

“Greenspan went out of his way to strike a balance between the threats facing the economy,” said David Jones, chief economist at Aubrey G. Lanston & Co. in New York. “He implied strongly that he will be keeping policy unchanged for some time to come.”

While expressing high uncertainty about the exact fallout from Asia, Greenspan delivered an upbeat assessment of current conditions.

The Labor Department reported Tuesday that inflation disappeared in January with consumer prices not rising at all, helped out by the biggest plunge in energy prices in seven years. In a second report, the Conference Board said consumer confidence surged to a 30-year high this month, reflecting satisfaction with the economy’s performance.

As part of the Greenspan’s report to Congress, the Fed updated its economic outlook. The Fed projected that growth would slow from a 10-year high of 3.8 percent in 1996 to a more sustainable pace of around 2 percent to 2.75 percent this year. It expects consumer prices to rise by 1.7 percent to 2.25 percent.