Greenspan flies inflation warning flag

Alan Greenspan, the chairman of the Federal Reserve, yesterday cheered US financial markets with a broadly upbeat assessment of the American economy even as he raised a warning flag about his concerns that renewed inflationary pressures may be around the corner.

In a testimony on Capitol Hill, Mr Greenspan also defended comments he made in December about "irrational exuberance" in the US equity markets. The remark, which sent tremors through Wall Street at the time, "was not a shot from the hip", he insisted. The performance of the markets, he said yesterday, remained "breathtaking".

Translating Mr Greenspan's words as favourable news, investors yesterday gave a new lift to the Dow Jones Industrial Average which has continued to soar into record territory since the new year. After sagging more than 40 points at the start of trading, it closed up 40.03 at 6,883.90 after Mr Greenspan's comments.

Noting the continued stable growth of the US economy, Mr Greenspan told the US Senate that the economy "has retained considerable vigour, with few signs of imbalances and inflationary tensions that have disrupted past expansions". He reported that the economy grew about 3 per cent last year.

The chairman attributed the absence of inflationary pressure and low wage growth on several factors, in particular a continuing sense of job insecurity in the US workplace that was keeping wage pressures down. Among others were high US imports, increased deregulation, the declining influence of the unions and a sharp slowdown in the rise of healthcare costs.

There was a clear warning in his testimony, however, that wages could begin to succumb to upward pressures at any time, which could feed into higher inflation. "The recent pick-up in some measures of wages suggests that the transition may be already running its course," Mr Greenspan warned. The jobless rate in the US is at a seven-year low of only 5.3 per cent.

Mr Greenspan also reminded listeners that in setting monetary policy, the Fed always had to look roughly six months into the future. This was in part because there was always a time lag of about the same period before any interest rate adjustment began to bite.

That was taken by many analysts as a clear signal of the Fed's readiness to tighten monetary conditions at the first real sign of an uptick in wages and inflation. "Greenspan is clearly preparing the market for a possible tightening move. He leaves no question about that," said David Jones, an analyst with Aubrey Lanston.

The next meeting of the Fed's Open Market Committee, which sets interest rates, is scheduled for 3-4 February, by which time more data will be available to indicate whether new inflationary dangers are indeed gathering.

Addressing the extraordinary ebullience of Wall Street, Mr Greenspan remarked that the "stock market continued to climb at a breathtaking rate". He was forced on to the defensive about his "irrational exuberance" quip of last December by some aggressive questioning from senators.

"It was not a shot from the hip," Mr Greenspan said, explaining that he had been trying to lay out all the various factors that had to be taken into account by the Fed in determining monetary policy.

"We thought long and in detail that any such statement could very well have immediate market effects."

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Software Development Manager

£40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...

Ashdown Group: Product Manager - (Product Marketing, Financial Services)

£30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

Recruitment Genius: Compliance Assistant

£13000 per annum: Recruitment Genius: This Pension Specialist was established ...

Ashdown Group: Market Research Executive

£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

Day In a Page

Isis hostage crisis: The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power

Isis hostage crisis

The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power, says Robert Fisk
Missing salvage expert who found $50m of sunken treasure before disappearing, tracked down at last

The runaway buccaneers and the ship full of gold

Salvage expert Tommy Thompson found sunken treasure worth millions. Then he vanished... until now
Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Maverick artist Grayson Perry backs our campaign
Assisted Dying Bill: I want to be able to decide about my own death - I want to have control of my life

Assisted Dying Bill: 'I want control of my life'

This week the Assisted Dying Bill is debated in the Lords. Virginia Ironside, who has already made plans for her own self-deliverance, argues that it's time we allowed people a humane, compassionate death
Move over, kale - cabbage is the new rising star

Cabbage is king again

Sophie Morris banishes thoughts of soggy school dinners and turns over a new leaf
11 best winter skin treats

Give your moisturiser a helping hand: 11 best winter skin treats

Get an extra boost of nourishment from one of these hard-working products
Paul Scholes column: The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him

Paul Scholes column

The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him
Frank Warren column: No cigar, but pots of money: here come the Cubans

Frank Warren's Ringside

No cigar, but pots of money: here come the Cubans
Isis hostage crisis: Militant group stands strong as its numerous enemies fail to find a common plan to defeat it

Isis stands strong as its numerous enemies fail to find a common plan to defeat it

The jihadis are being squeezed militarily and economically, but there is no sign of an implosion, says Patrick Cockburn
Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action

Virtual reality: Seeing is believing

Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action
Homeless Veterans appeal: MP says Coalition ‘not doing enough’

Homeless Veterans appeal

MP says Coalition ‘not doing enough’ to help
Larry David, Steve Coogan and other comedians share stories of depression in new documentary

Comedians share stories of depression

The director of the new documentary, Kevin Pollak, tells Jessica Barrett how he got them to talk
Has The Archers lost the plot with it's spicy storylines?

Has The Archers lost the plot?

A growing number of listeners are voicing their discontent over the rural soap's spicy storylines; so loudly that even the BBC's director-general seems worried, says Simon Kelner
English Heritage adds 14 post-war office buildings to its protected lists

14 office buildings added to protected lists

Christopher Beanland explores the underrated appeal of these palaces of pen-pushing
Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Scientists unearthed the cranial fragments from Manot Cave in West Galilee