Renewed Greenspan fears rattle markets

The chairman of the Federal Reserve, Alan Greenspan, rattled world markets yesterday by voicing anew his misgivings about surging share prices in the United States, and giving his clearest warning yet that interest rates might have to rise soon to keep inflation at bay.

Within minutes of his remarks, delivered in his regular twice-yearly report on the economy to the Senate Banking Committee, the Dow had plunged more than 100 points, while the 30-year Treasury bond fell more than a point.

Both markets recouped part of the losses later, with the Dow ending the day below the 7,000 level at 6,983.18, a fall of more nearly 55 points.

In London, the FTSE 100 index ended more than 15 points down at 4,329.3. This was up from its low and only 33 points below its record.

As ever, Mr Greenspan's utterances were dry and Delphic, as he listed the reasons the US economy had lately performed so well, combining solid growth with low inflation: "Even I must admit that our economic prospects in general are quite favourable."

Among the reasons he gave were a strong dollar which braked imported inflation, a lingering job-market insecurity that had tempered wage demands, and big profit margins that allowed companies to absorb higher costs without raising prices.

But he added in the next breath, that while the central bank still expected US inflation to stay below 3 per cent in 1997, these special factors could well prove temporary. And, he hinted, given the time required for interest rate changes to work through into the economy, what would be the Fed's first raise in short-term rates since 1 February 1995 could be just around the corner.

"A pre-emptive policy tightening," he said, "may become appropriate before any sign of actual higher inflation becomes evident."

Mr Greenspan seemed most concerned, however, by the rampant stock market, which last week breached the 7,000 barrier, a rise of some 10 per cent since he famously proclaimed last December his fears over "irrational exuberance" in the equity market.

Yesterday, he seemed to be making another attempt to talk prices down without using the big stick of higher interest rates. Caution, he declared, seemed "especially warranted" over the sustained advance in prices. Referring explicitly to his previous warning which markets brushed aside in barely 24 hours, he re-iterated that "there are reasons in the current environment to keep this question on the table".

More specifically, he cast doubt on the fashionable belief that fundamental changes in economic conditions - global competition and new information technology are the two most often cited - justified the surge in stock prices.

There might be reasons to believe in something "fundamentally new." But, he went on, "history is strewn with visions of such `new eras' that in the end have proven to be mirages. In short, history counsels caution. Such caution may be especially warranted with regard to the sharp rise in equity prices during the past two years".

On balance, Mr Greenspan's words have strengthened the chances the Fed's interest rate steering committee will opt for a small increase in the Fed funds rate - currently at 5.25 per cent - when it next meets on 25 March. If not then, most analysts expect a move before June.

Even so, the central bank reckons the current steady expansion will continue.

Its 1997 forecast predicts growth of between 2 and 2.25 per cent, and an unemployment rate of 5.5 per cent or less for the rest of the year.

In the UK gilts were hit more than shares by Mr Greenspan's warning. But a pounds 2.5bn auction of gilts by the Bank of England earlier in the day was a moderate success, subscribed just under two times.

Arts and Entertainment
Sydney and Melbourne are locked in a row over giant milk crates
art
News
Kenny Ireland, pictured in 2010.
peopleActor, from House of Cards and Benidorm, was 68
News
A scene from the video shows students mock rioting
newsEnd-of-year leaver's YouTube film features staging of a playground gun massacre
Travel
travel
PROMOTED VIDEO
Voices
A family sit and enjoy a quiet train journey
voicesForcing us to overhear dull phone conversations is an offensive act, says Simon Kelner
News
i100This Instagram photo does not prove Russian army is in Ukraine
News
Morrissey pictured in 2013
people
Sport
sportVan Gaal has £500,000 video surveillance system installed to monitor Manchester United players
Environment
View from the Llanberis Track to the mountain lake Llyn
Du’r Arddu
environmentA large chunk of Mount Snowdon, in north Wales, is up for sale
Life and Style
Martha Stewart wrote an opinion column for Time magazine this week titled “Why I Love My Drone”
lifeLifestyle guru Martha Stewart reveals she has flying robot... to take photos of her farm
Arts and Entertainment
The Secret Cinema performance of Back to the Future has been cancelled again
filmReview: Sometimes the immersive experience was so good it blurred the line between fiction and reality
News
ebookA unique anthology of reporting and analysis of a crucial period of history
News
i100
Life and Style
The director of Wall-E Andrew Stanton with Angus MacLane's Lego model
gadgetsDesign made in Pixar animator’s spare time could get retail release
News
peopleGuitarist, who played with Aerosmith, Lou Reed and Alice Cooper among others, was 71
Environment
Tyred out: should fair weather cyclists have a separate slow lane?
environmentFormer Labour minister demands 'pootling lanes' for women cyclists
News
people
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

1st Line Support Technician / Application Support

£20000 - £24000 per annum: Harrington Starr: A leading provider of web based m...

Team Secretary - (Client Development/Sales Team) - Wimbledon

£28000 - £32000 per annum: Ashdown Group: Secretary (Sales Team Support) - Mat...

Accountant / Assistant Management Accountant

Competitive (DOE): Guru Careers: We are looking for an Assistant Management Ac...

Senior Investment Accounting Change Manager

£600 - £700 per day + competitive: Orgtel: Senior Investment Accounting Change...

Day In a Page

Dress the Gaza situation up all you like, but the truth hurts

Robert Fisk on Gaza conflict

Dress the situation up all you like, but the truth hurts
Save the tiger: Tiger, tiger burning less brightly as numbers plummet

Tiger, tiger burning less brightly

When William Blake wrote his famous poem there were probably more than 100,000 tigers in the wild. These days they probably number around 3,200
5 News's Andy Bell retraces his grandfather's steps on the First World War battlefields

In grandfather's footsteps

5 News's political editor Andy Bell only knows his grandfather from the compelling diary he kept during WWI. But when he returned to the killing fields where Edwin Vaughan suffered so much, his ancestor came to life
Lifestyle guru Martha Stewart reveals she has flying robot ... to take photos of her farm

Martha Stewart has flying robot

The lifestyle guru used the drone to get a bird's eye view her 153-acre farm in Bedford, New York
Former Labour minister Meg Hillier has demanded 'pootling lanes' for women cyclists

Do women cyclists need 'pootling lanes'?

Simon Usborne (who's more of a hurtler) explains why winning the space race is key to happy riding
A tale of two presidents: George W Bush downs his paintbrush to pen father’s life story

A tale of two presidents

George W Bush downs his paintbrush to pen father’s life story
Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover

The dining car makes a comeback

Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover
Gallery rage: How are institutions tackling the discomfort of overcrowding this summer?

Gallery rage

How are institutions tackling the discomfort of overcrowding this summer?
Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players

Eye on the prize

Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players
Women's rugby: Tamara Taylor adds fuel to the ire in quest to land World Cup

Women's rugby

Tamara Taylor adds fuel to the ire in quest to land World Cup
Save the tiger: The day America’s love of backyard tigers led to a horrific bloodbath

The day America’s love of backyard tigers led to a horrific bloodbath

With only six per cent of the US population of these amazing big cats held in zoos, the Zanesville incident in 2011 was inevitable
Samuel Beckett's biographer reveals secrets of the writer's time as a French Resistance spy

How Samuel Beckett became a French Resistance spy

As this year's Samuel Beckett festival opens in Enniskillen, James Knowlson, recalls how the Irish writer risked his life for liberty and narrowly escaped capture by the Gestapo
We will remember them: relatives still honour those who fought in the Great War

We will remember them

Relatives still honour those who fought in the Great War
Star Wars Episode VII is being shot on film - and now Kodak is launching a last-ditch bid to keep celluloid alive

Kodak's last-ditch bid to keep celluloid alive

Director J J Abrams and a few digital refuseniks shoot movies on film. Simon Usborne wonders what the fuss is about
Once stilted and melodramatic, Hollywood is giving acting in video games a makeover

Acting in video games gets a makeover

David Crookes meets two of the genre's most popular voices