WHEN ALAN GREENSPAN speaks, are people listening? The Federal Reserve Board chairman evidently thinks his December warning about "irrational exuberance" in the financial markets did not get the attention it deserved.
The Dow Jones average, after a momentary plunge, kept climbing until it broke the 7000 mark with the new year. And so, Mr. Greenspan returned to the fray this week with a hint that the Fed may soon raise interest rates as a "pre-emptive" strike against inflation. In two days, the Dow fell more than 100 points.
"Caution seems especially warranted with regard to the sharp rise in equity prices during the past two years," he intoned. "These gains have obviously raised questions of sustainability." It is rare for this Fed chairman -- indeed for any Fed chairman -- to focus so sharply on Wall Street behavior. If his jawboning fails again to calm the markets, his record suggests that he will resort to an increase in the short-term Federal funds rate, now at 5.25 percent.
One reason for Mr. Greenspan's frustration is a fundamental change in American investing habits as a result of participatory pension and retirement plans. There are so many dollars chasing after lucrative returns that stock prices keep going up and up. What he fears is not a leveling off but a panicky bursting of the bubble when the supposedly inevitable downturn comes.
Another problem is the little-noticed contradiction between his concern about inflation and his conviction that government statistics exaggerate its extent. For if the Consumer Price Index is too high, as Mr. Greenspan believes, then the inflation rate is perhaps a full point lower than the 3 percent now listed.
The Fed chairman's response is that he has to be on the lookout for storm warnings, such as a feeling of greater job security within the work force that could accelerate the rate of wage increases. "A pre-emptive policy tightening may become appropriate before any sign of actual higher inflation becomes evident," he told Congress. He advanced similar arguments in 1994 when he pushed up interest rates. Instead of short-circuiting the recovery, as some feared, it had the effect of prolonging it. Thus, Mr. Greenspan speaks this time with greater authority -- even if the bullish won't listen.
Pub Date: 2/28/97