Top Fed Officials Warn of Oil Price Risks : LUSENET : TB2K spinoff uncensored : One Thread


Thursday October 19 11:00 AM ET

Top Fed Officials Warn of Oil Price Risks

By Knut Engelmann

WASHINGTON (Reuters) - Federal Reserve policymakers warned Thursday that rising oil prices could yet undermine the U.S. economy, signaling they remain ready to raise interest rates should that be necessary to keep the expansion alive.

Fed Chairman Alan Greenspan (news - web sites), in his first detailed remarks on the economy since July, told an audience in Washington that the central bank was closely watching the effects of higher oil prices but noted that at least so far, these had been modest.

``Policymakers will need to be on the alert for oil-driven, indeed energy-driven, risks to our expansion,'' he added.

Addressing the Cato Institute, the powerful U.S. central bank chief also reiterated previous warnings that increases in productivity growth and in fiscal surpluses were unlikely to last forever, adding to potential inflation threats.

His remarks came less than a month ahead of the Fed's next rate-setting meeting, at which it is widely expected to keep short-term interest rates on hold but warn once more of inflation risks to the U.S. economy's record expansion.

Greenspan's speech had little immediate effect on financial markets, as investors read his remarks as confirming forecasts for unchanged interest rates at least in the short run. Stock prices rallied after sharp falls Wednesday, while inflation-sensitive bond prices were little changed.

``Another Fed-on-hold speech,'' said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, N.Y.

The Fed has kept borrowing costs unchanged at its most recent three rate meetings, after bumping them up six times between June 1999 and May, but has warned that it still regards inflation as the main threat to the U.S. economy.

Twin Threats

Meanwhile, Fed governor Laurence Meyer, speaking in St. Louis, Mo., said the U.S. economy may finally have entered a period of slower growth but still faced inflation threats from higher oil prices and possible weaker productivity growth.

``I believe the economy will ultimately be confronted by a transition and that we may already be in this transition, specifically to slower growth and perhaps also higher core inflation,'' he said.

Still, Meyer -- one of the Fed's leading inflation hawks -- said he hoped the economy was on track for a ``soft landing,'' in which growth slows enough to curb inflation without pushing the economy into recession.

Greenspan noted that rising oil prices -- supply worries and political tensions in the Middle East have driven them to 10-year highs -- so far had affected neither inflation expectations nor consumer spending, the economy's main engine.

``To date, the spillover from the surge in oil prices has been modest,'' he said, noting that consumer spending remained ''firm.''

Greenspan said oil shocks were posing less of a threat to the U.S. economy than in previous years, because it had become less energy-dependent and because oil producers had significantly lowered the cost of additional supplies.

But coupled with lingering political worries and continuing precautionary buying sprees by consumers and firms, higher oil prices still had ``potential implications for economic stability and for monetary policy,'' he said.

``Even though the intensity of oil consumption is markedly below where it was thirty years ago, it still has the potential to alter the forces governing economic growth in the United States,'' Greenspan added.

Save The Surplus

Greenspan also warned that ``some of those favorable factors that I discussed earlier -- in particular, growing fiscal surpluses and accelerating productivity -- remain in place, but presumably will not persist indefinitely.''

He said a tapering off of productivity acceleration, one of the key forces in keeping inflation under wraps so far, was inevitable ``at some point in the future.'' That could be a problem particularly against the backdrop of the tight U.S. jobs market, which has heightened the Fed's inflation worries.

But Greenspan reiterated that there still was no evidence productivity growth was peaking.

Meyer agreed there were limits to how long productivity gains could last. ``It is quite likely that productivity growth, after reaching a peak, will then diminish,'' he said, which could raise both unemployment and inflation.

Greenspan, in an apparent barb aimed at both Democratic and Republican presidential candidates, said he also had doubts ''whether the dynamics of the political process, some of which have been on display in the current budgetary deliberations, will allow the surpluses to grow.''

Both Democratic candidate Vice President Al Gore (news - web sites) and his Republican rival George W. Bush (news - web sites) have proposed to use large and growing budget surpluses to cut taxes and increase spending in some areas. Greenspan has repeatedly urged politicians to save the surplus to pay down the national debt.

-- (M@rket.trends), October 19, 2000


Other recent comments by Fed officials.

-- (M@rket.trends), October 20, 2000.

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