Preparing for the possibility of more interest-rate increases, Federal Reserve Chairman Alan Greenspan is starkly describing the costs of permitting "insidious inflationary pressures" to build.
"Inflation . . . destroys jobs," he said Thursday night in New York. "You cannot have a vibrant growing economy without sound money. History is unequivocal on this."As usual, Greenspan refrained from saying explicitly what Fed policymakers would do when they meet next on May 20. But the unusual clarity and forceful tone of his remarks suggested they probably would add to the quarter-point interest rate increase engineered on March 25.
"For the Federal Reserve to remain inactive against a possible buildup of insidious inflationary pressures would be to sanction a threat to the job security and standards of living of too many Americans," he told an audience at New York University's Stern School of Business.
The Tokyo stock market reacted calmly to Greenspan's remarks, said Satoru Ishihara, deputy general manager at Yamaichi Securities. A morning decline was caused instead by jitters on the foreign exchange market, namely, the dollar's sharp retreat against the yen, he said.
"As a matter of fact, everyone has been thinking that the Fed would raise interest rates again sooner or later," Ishihara said. "If such a pre-emptive measure were taken to cool down the overheated New York market, it would be welcomed by the Japanese market."
Factory owners, labor unions and lawmakers in the United States have criticized the March increase as unnecessary because inflation is at a 30-year low. But Greenspan said it was "eminently sensible."
"It would have been folly not to take this small, prudent step," he said.
The speech appears to be another of Greenspan's efforts to prepare financial markets for higher interest rates, dating back to early December when he posed his now-famous question about "irrational exuberance."
As he repeated his caution in stronger terms and then oversaw the first rate increase in two years, the Dow Jones average of industrial stocks lost nearly 10 percent of its value between March 11 and April 11.
However, with recent government data suggesting the economy is starting to cool, traders had begun betting the Fed might postpone another rate increase until midsummer, and the Dow average climbed to a new high this week.
Greenspan made no reference to the stock market in his speech Thursday. This time he referred to the dangers of "excessive credit creation," strain on the ability of factories to meet the demand for goods and "growing tightness in labor markets."
A Fed survey released Wednesday found "fierce competition" among business lenders and "credit standards being lowered."
Greenspan said, "It is clear from our history that surges in growth financed by excessive credit creation . . . threaten the underlying stability of our economy."