Greenspan grilled over `exuberance' comments

Alan Greenspan, chairman of the Federal Reserve, came in for some tough questioning from the House Budget Committee about his recent remarks about "irrational exuberance" which sent shudders through world markets.

Congressman Jim Bunning asked Mr Greenspan: "Why have you on two occasions taken to jawboning the US stock market and the US bond market with your comments?

"How come when you spoke on two occasions we had a sell-off in the Dow Jones, a sell-off in the Nasdaq and a sell-off in the bond market of considerable magnitude?"

Mr Greenspan replied: "That was not what I was intending to do. These are very ... elaborate international markets which are driven by decisions of millions of people. Nobody can affect them in a fundamental way. What I was trying to do in December, and what I did in my Humphrey-Hawkins testimony last week, was to try to lay out all of the various factors which we examine for purposes of monetary policy."

On the outlook for the economy, Mr Greenspan said the most likely prospect for the US was sustainable growth, accompanied by low and stable inflation. "The performance of the US economy over the last year has been quite favourable, with few signs of the imbalances that might typically have been expected by the sixth year of a cyclical expansion," he said.

The index of US leading economic indicators, intended to project economic activity over the next half year, rose in January, the 12th straight month without a decline and the longest such string since 1984. The Conference Board's index, a composite measure of 10 economic indicators, rose 0.3 per cent in January after rising an unrevised 0.1 per cent in December. Before the report, analysts had expected a 0.1 per cent gain for January.

Mr Greenspan said a significant drop in long-term US interest rates was possible if Congress and President Clinton could arrive at a credible plan to balance the budget. However, such a plan would almost certainly need to include measures to curb the growth in entitlement spending, he said.

"I would think that if you get a credible budget projection which really altered the future projection of entitlements by changing the law today ... I think the markets would respond quite positively," he said.

Speaking about the reduction in long-term interest rates that would result, he said: "It's hard for me to put an order of magnitude on it but clearly it could be significant."

But in late trading last night Wall Street succumbed to last- minute nerves ahead of the second phase of Mr Greenspan's Humphrey-Hawkins testimony today. The Dow Jones ended 66 points down at 6853.

Shares in London were more buoyant with the FTSE 100 ahead 50.6 points at an all-time high of 4,357.7.

Market report, page 23