WASHINGTON — Federal Reserve Chairman Alan Greenspan expressed satisfaction Tuesday that the rate of economic growth is slowing to a more sustainable pace, but he warned of the dangers posed to the economy from unexpected shocks.
The Dow Jones industrial average, which had been up about 180 points before Greenspan started speaking, shot higher and was up more than 300 points at midday.
Greenspan specifically mentioned this year's sharp plunge in stock prices and the possibility this could cause a cutback in consumer and business spending. He also said rising tensions in the Middle East could cause oil prices to surge unexpectedly.
Greenspan's remarks, delivered to a banking conference in New York, were the firmest signal yet that the central bank is switching its chief concern from fighting inflation by raising interest rates to worrying that its credit tightening has gone too far and could prompt an outright recession.
"In periods of transition from unsustainable to more modest rates of growth, an economy is obviously at increased risk of untoward events that would be readily absorbed in a period of boom," Greenspan said.
Greenspan's remarks indicated he believes the economy has shifted into a lower gear and the third quarter was not just a temporary pause likely to be followed by a rebound that would bring back inflation concerns.
At one point, he talked about "the economy's transition to a more sustainable balance in the growth of demand and supply."
One of the primary reasons the Fed has given for its six rate increases was concerns that the demand for workers was outstripping the supply because of a jobless rate that has fallen to a three-decade low of 3.9 percent.
While labor markets remain tight, Greenspan said the rise in new claims for unemployment benefits in recent weeks "may be an early harbinger of an easing" of the hot labor market.
Despite his concerns, Greenspan stressed that the current situation is not like the turbulence of 1998 when a burgeoning Asian crisis and Russian default on its bonds plunged U.S. and global financial markets into a tailspin. At that time, the Fed responded with three rapid rate cuts to restore calm.
He said the decline in stock prices meant they had "given back some of their extraordinary gains posted in recent years" as investors adjusted to lower earnings expectations. Since 1996, Greenspan has been expressing worries that "irrational exuberance" might be pushing stock prices beyond what could be justified.
On oil, Greenspan said so far the sharp rise in prices has provided "little evidence of the type of destabilizing inflationary pressures" that occurred in the oil price shocks of the 1970s and 1980s.
But he cautioned that "Middle East tensions have heightened such risks." The central bank will have to be on guard against repeating mistakes of the 1970s, when it provided too much money to cushion the shock of the oil increases and ended up fueling a decadelong bout with inflation.