The wild gyrations in the stock market in recent days could have a long-run benefit for the U.S. economy by slowing growth to a sustainable pace and dampening inflationary pressures, Federal Reserve Chairman Alan Greenspan said Wednesday.
"Things are less out of line" in the aftermath of Monday's market drop, Greenspan told the congressional Joint Economic Committee.The remarks by the man who less than a year ago warned against "irrational exuberance" on Wall Street helped send stock prices soaring Wednesday, fueling a rally begun Tuesday.
Greenspan said if the markets now calm down, "it is quite conceivable that a few years hence we will look back at this episode, as we now look back at the 1987 crash, as a salutary event."
Even with Tuesday's market rebound, he said, consumers feel less wealthy than they did a week ago, and this will dampen spending.
The stock market rally, already under way, accelerated as Green-span spoke. Analysts said that part of the surge reflected relief that Greenspan did not repeat warnings he had made just three weeks ago that economic growth might be unsustainable.
The Dow Jones industrial average, which rose as much as 123 points shortly after the opening of trading, was up 10.31 points at 7508.63 by midday. The Nasdaq Stock Market was also modestly higher.
"What the markets didn't hear was more important than what they did hear today," said David Wyss, economist at DRI-McGraw Hill Inc. "The market was worried that Greenspan was worried that he would warn once again that growth was unsustainable or inflation was dangling like a thin thread over our heads. He didn't say anything like that."
Wyss said Greenspan's comments Wednesday convinced him that the central bank will leave interest rates unchanged for the rest of the year.
As did President Clinton on Tuesday, Greenspan declared that the underlying U.S. economy remained strong despite the market turbulence of the past week. The Dow Jones industrial average plummeted a record 554 points on Monday and regained a one-day record 337 points on Tuesday.
Greenspan expressed satisfaction that stock prices in the United States and around the world were now lower than they were just a week ago.
Greenspan said that even if turmoil in Southeast Asian markets had not led to the big sell-off on Wall Street, some other event eventually would have driven down a market that had climbed too high.
All the turmoil had to be viewed against the backdrop of a "continuing impressive performance of the American economy in recent months. Growth appears to have remained robust and inflation low, and even falling, despite an ever-tightening labor market," Greenspan said.
But he said the Fed must remain vigilant to ensure that tight labor markets do not cause inflation.
Wall Street trading slowed considerably from Tuesday's blistering pace, which produced the heaviest volume in Wall Street history.
And reassured by the sharp rise in New York, Hong Kong investors rushed back into the market Wednesday, driving its main index up nearly 19 percent in its largest single-day rise ever.