Greenspan's Fed Is Waiting and Worrying --- Agency Is Poised to Act, Chairman Tells Senators; Market Reaction Mixed
WASHINGTON -- Federal Reserve Chairman Alan Greenspan said the Fed is "ready to move quickly" -- but doesn't know if it will be to raise interest rates or to lower them.</br></br>Mr. Greenspan's comments to the Senate Banking Committee confirmed the widespread perception that the Fed is in "wait-and-worry" mode, as Salomon Smith Barney economists put it, and isn't planning any change in rates soon. Although the stock market showed a mixed reaction to the Fed chief's testimony, bond prices sank. Analysts pointed to Mr. Greenspan's comment that the Fed is evaluating whether the third of last year's three quarter-percentage-point interest rate cuts "remains appropriate."</br></br>But most of Mr. Greenspan's testimony was a catalog of the "considerable upside and downside risks to the economic outlook" and an attempt to explain why inflation remains so docile.</br></br>The upside risk is that the economy's strength will outstrip its capacity to produce, and inflation will finally emerge. "After eight years of economic expansion," Mr. Greenspan said, "the economy appears stretched in a number of dimensions." Employers can't keep hiring as they have been, because the hiring pool is shrinking.</br></br>But the downside risks are also substantial. Stock prices, which have sustained consumer and business spending, are "high enough to raise questions about whether shares are overvalued," Mr. Greenspan said. And weakening economies overseas, not just in emerging markets of Asia and Latin America, "could further depress demands for our exports," the Fed chairman added.