Dow hits record 8,061 after Greenspan testimony

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The Independent Online
Stocks soared in New York yesterday to a record after comments by the Federal Reserve Chairman, Alan Greenspan, before the US Congress that rang no alarm bells about a return of inflation or any imminent increase in interest rates.

While Mr Greenspan reiterated his mantra that he is always on high alert for signs of inflation, he offered no evidence that there were any on the horizon. "Mr Greenspan is paid to worry," commented Mickey Levy of Nationsbanc Capital Markets. "But he can't find much to worry about right now."

Indeed, in his semi-annual Humphrey-Hawkins testimony to the Senate, Mr Greenspan conceded that the latest data suggested that the US economy had cooled slightly since the first quarter, when growth hit a high-octane 5.9 per cent. The Fed last raised rates by a quarter of a percentage point in March.

"I have no doubt that the current stance of policy ... will need to be changed at some point," Mr Greenspan said. But he added: "For the present, demand growth does appear to have moderated."

Mr Greenspan's words appeared to convince the markets that another interest rate hike in the US could be months away. Within minutes of his prepared text being released, the Dow Jones Industrial Average climbed 150 points, back above the 8,000 mark and into uncharted territory. It later closed at a record 8,061.65, up 154.98 and near the day's highs.

"Clearly the Fed is absolutely on hold until there is some sign of inflation and for the moment it is nowhere to be seen," Mr Levy suggested.

Mr Greenspan admitted to being almost puzzled by an economy that is in its third longest stretch of growth ever and which continues to defy inflation, even while unemployment had dropped to its lowest level in 25 years.

But the Fed chairman dismissed the notion favoured by some experts that he was deliberately holding back from any tightening of monetary conditions to test how far growth could go in the so-called "new" or "goldilocks" economy before inflation was finally triggered.

The Fed, he said, "is not, as some commentators have suggested, involved in an experiment that deliberately prods the economy to see how far and how fast it can grow. The costs of a failed experiment would be much too burdensome."

In reminding his audience of the continuing readiness of the Fed to act on inflation, Mr Greenspan compared his task to that of a car driver. "A driver might tap the brakes to make sure not to be hit by a truck coming down the street, even if he thinks the chances of such an event are relatively low."

He cautioned: "The Federal Reserve must be alert to the possibility that additional action might be called for to forestall excessive credit creation."

There was some irony to the strong reaction of the markets to the remarks. Six months ago, Mr Greenspan shocked investors in the same testimony by terming the stock market boom as "irrational exuberance".

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