Posted at 9:39 a.m. PST Thursday, January 29, 1998
Greenspan: U.S. will feel Asia impact soon
WASHINGTON (AP) -- The American economy has just begun to feel the
impact of the financial storms swirling through Asia and will slow
noticeably ``before spring is over,'' Federal Reserve Chairman Alan
Greenspan said today.
``We have as yet experienced only the peripheral winds of the Asian
crisis,'' Greenspan told the Senate Budget Committee in his first
congressional appearance in three months.
But, he said, before spring ends sharp currency devaluations in Asia
will show up in this country through ``reductions in demand for our
exports and intensified competition from imports.''
``All of this suggests that the growth of economic activity in this
country will moderate from the recent brisk pace,'' he said.
Economists said Greenspan's remarks confirmed that the Federal Reserve
has no plans to raise interest rates.
``They imply there's not a chance of a tightening move because, at the
very least, Asia is weakening the economy enough to eliminate any threat
of inflation,'' said economist David Jones of Aubrey G. Lanston & Co. in
New York. ``And it raises the possibility of an interest rate cut
sometime around mid year.''
That cheered Wall Street. Bond prices surged, pushing down the yield on
the benchmark 30-year Treasury bond to 5.87 percent from 5.94 percent
late Wednesday. The Dow Jones average of industrial stocks was up more
than 80 points at midday.
Answering a senator's question, Greenspan said he did not believe Asian
turmoil to date would result in significant U.S. job losses. But he
warned, ``It is very important for us to recognize that if the Asian
situation does not stabilize reasonably quickly ... it will have more
than a modest impact.''
Greenspan's last congressional appearance came in late October just days
after the Asian crisis provoked a record 554-point drop in the Dow.
At that time, he said it was conceivable the crisis could prove a
``salutary event'' for the American economy, slowing growth enough to
keep inflation in check but not so much as to threaten the nearly
7-year-old expansion. He stuck with that view today.
``A moderation (in economic growth) would appear helpful at this
juncture,'' he said. ``The likelihood that we shall be seeing some lower
prices on imported goods as a result of the difficulties in Asia may
afford some breathing room from inflation pressures.''
As recently as early October, Greenspan was warning that labor shortages
created by last year's robust economic growth threatened to put the
economy on ``an unsustainable track.''
However, today, he cited risks to the economy from both inflation and
from too-rapid disinflation.
Lower import prices ``will not permanently supress the risks inherent in
tightened labor markets,'' he said. The risk is that labor shortages
will drive wages up faster, forcing businesses to raise their prices
more rapidly.
``Conversely, a continuation of the Asian crisis should give us pause in
assuming that our economy will remain robust indefinitely,'' he said.
``As a consequence, we must be vigilant to the reemergence of
destabilizing influences -- both higher inflation, and shortfalls in
demand and decreases in some prices that would press the disinflation
process too far, too fast.''
Greenspan addressed his remarks to a Senate panel which this year faces
the happy dilemma of what to do with a projected budget surplus.
President Clinton wants to use excess money to help preserve Social
Security. But he also wants to spend more to build new schools and make
child care more accessible. Republicans want to cut taxes.
However, the central bank chairman cautioned, ``We have no guarantee
that the projected surpluses will actually materialize.''
Unless steps are taken to put the Social Security trust fund on a
sounder footing, Greenspan said, the budget ``will almost inevitably
turn to large and sustained deficits as the baby boom generation moves
into retirement.''
``The outpouring of proposals for using the anticipated surplus does not
bode well for the prospect of maintaining fiscal discipline,'' he said.
``We must not allow the recent good news on the budget to lull us into
letting down our guard.''
The deficit in fiscal 1997 fell to a 23-year low of $22 billion. On
Wednesday, the Congressional Budget Office released projections showing
the budget remaining close to balance over the next few years and then
moving into surplus until the middle of the next decade.
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