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.

Start your day with The Independent, sign up for daily news emails
  • Get to the point
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: Financial Adviser

£20000 - £60000 per annum: Recruitment Genius: Are you recently QCA Level 4 qu...

SThree: Graduate Recruitment Resourcer

£20000 - £22500 per annum + OTE £30K: SThree: SThree Group have been well esta...

Guru Careers: Application Support Analyst / 1st Line Support

£25 - 30k: Guru Careers: We are seeking an Application Support Analyst / 1st L...

Guru Careers: .NET Developer / Web Developer

£45K - £55K (DOE) + Benefits: Guru Careers: We are seeking a full stack .NET D...

Day In a Page

Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

How a costume drama became a Sunday night staple
Miliband promises no stamp duty for first-time buyers as he pushes Tories on housing

Miliband promises no stamp duty for first-time buyers

Labour leader pushes Tories on housing
Aviation history is littered with grand failures - from the the Bristol Brabazon to Concorde - but what went wrong with the SuperJumbo?

Aviation history is littered with grand failures

But what went wrong with the SuperJumbo?
Fear of Putin, Islamists and immigration is giving rise to a new generation of Soviet-style 'iron curtains' right across Europe

Fortress Europe?

Fear of Putin, Islamists and immigration is giving rise to a new generation of 'iron curtains'
Never mind what you're wearing, it's what you're reclining on

Never mind what you're wearing

It's what you're reclining on that matters
General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

Chuka Umunna: A virus of racism runs through Ukip

The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
Yemen crisis: This exotic war will soon become Europe's problem

Yemen's exotic war will soon affect Europe

Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
Marginal Streets project aims to document voters in the run-up to the General Election

Marginal Streets project documents voters

Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

The real-life kingdom of Westeros

Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?
How to survive a social-media mauling, by the tough women of Twitter

How to survive a Twitter mauling

Mary Beard, Caroline Criado-Perez, Louise Mensch, Bunny La Roche and Courtney Barrasford reveal how to trounce the trolls
Gallipoli centenary: At dawn, the young remember the young who perished in one of the First World War's bloodiest battles

At dawn, the young remember the young

A century ago, soldiers of the Empire – many no more than boys – spilt on to Gallipoli’s beaches. On this 100th Anzac Day, there are personal, poetic tributes to their sacrifice
Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves

Follow the money as never before

Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves, reports Rupert Cornwell
Samuel West interview: The actor and director on austerity, unionisation, and not mentioning his famous parents

Samuel West interview

The actor and director on austerity, unionisation, and not mentioning his famous parents
General Election 2015: Imagine if the leading political parties were fashion labels

Imagine if the leading political parties were fashion labels

Fashion editor, Alexander Fury, on what the leaders' appearances tell us about them
Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

The architect of the HeForShe movement and head of UN Women on the world's failure to combat domestic violence