Saturday, August 28, 1999

Fed chief: Stocks play bigger role


Economists told to shift focus

The New York Times and The Associated Press

        JACKSON HOLE, Wyo. — Alan Greenspan, chairman of the Federal Reserve, said Friday that the booming stock market now plays an increasing role in the Fed's debate over inflation but stopped short of calling the market overvalued.

        “We no longer have the luxury to look primarily to the flow of goods and services” when deciding interest rates, Mr. Greenspan said. In effect, he was labeling what he called the “extraordinary increase in stock prices over the past five years” as one of the major economic forces capable of pushing up the inflation rate.

        Traditionally, the economy was viewed as driving the market. Now the opposite is more and more the case, Mr. Greenspan suggested in his remarks at an annual Fed retreat. He signaled that rising stock prices should take a place alongside such traditional inflationary forces as tight labor markets, rising wages, shortages of goods and services, and the changing value of the dollar.

        The Dow dropped 108.28 points Friday in response. The concern appeared to be that if the Fed saw an inflationary force in stock prices, it might raise rates again to slow the economy. Two previous increases — this week and on June 30 — have failed to dampen the stock-buying euphoria. During the market's rise, families and companies have spent — or borrowed against — part of the windfall to buy additional goods and services. If a speculative bubble develops and the market finally crashes or declines sharply, the Fed's position is that it will step in then to minimize the damage by lowering rates and making money easier to borrow. Meanwhile, Mr. Greenspan said, the Fed will not attempt to influence the market itself.

       



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