11/10/97 JUST WHAT THE CHAIRMAN ORDERED

JUST WHAT THE CHAIRMAN ORDERED
Why the markets' gyrations don't worry Greenspan
When the stock market crashed in 1987, Federal Reserve Board Chairman Alan Greenspan--just two months on the job--went into crisis mode. Stunned by the unexpectedly steep drop, he became even more alarmed when the nation's stock exchanges started to unravel. So Greenspan organized a task force that worked around the clock to make sure the financial system didn't collapse. ''It was touch-and-go,'' recalls then Fed Vice-Chairman Manuel H. Johnson.
But when the Dow Jones industrial average went into another free fall on the afternoon of Oct. 27, the veteran Fed chief saw no reason to climb back into the bunker. Sure, he closely monitored the turmoil in Asian markets and consulted frequently with Treasury Secretary Robert E. Rubin. But Greenspan still found time to attend a scheduled lunch and treated the whole incident as just part of the routine for a central banker. And he certainly slept better than in 1987.
Why? The Fed chief has been hoping for months that the market would cool off. What's more, the 7% drop on Oct. 27, though breathtakingly rapid, was a drop in the bucket compared to 1987's 22% one-day plunge. And the U.S. economy in 1997 is a lot sounder than in 1987, when inflation and interest rates were on the rise.
So on Oct. 29, Greenspan--who weeks earlier had spooked the markets by hinting that he might nudge up rates to temper growth--went before Congress and made clear that he sees no reason to panic. To the contrary, Greenspan suggested that the crash might ultimately prove to be a ''salutary event'' if it slows the robust U.S. economy so inflation stays in check. ''The market's net retrenchment...should help to prolong our six-and-a-half-year business expansion,'' Greenspan said. Even if the market stages a new rally, Greenspan believes the Oct. 27 correction has been beneficial by driving out some of the speculators who helped create the volatility.
But if Greenspan seemed to take it all in stride, maybe it's because he had feared much worse. For nearly a year, he has been publicly questioning whether a speculative bubble was building in stocks that would eventually burst. Fed officials, who think stocks are still overvalued even after the market's late October gyrations, are clearly relieved that the correction came at 7,700 and not at, say, 9,700. At that level, there could have been a steeper correction with more damage to the financial system. ''In a perverse way, [the crash] could eliminate one of the imbalances that was threatening the economy,'' notes one Fed official.
If Greenspan's instincts are right, the crash should help slow the economy next year, making rate hikes unlikely in the near term. ''It has removed the pressure to tighten,'' acknowledges one Fed insider. Before the market turmoil, some Fed officials favored a rate boost as early as the next rate-setting meeting on Nov. 12.
GOOD OUTLOOK. Now, Fed officials believe the wave of devaluations in Asia will mean fewer U.S. exports to the region. And chastened U.S. investors will probably trim their spending. The rule of thumb at the Fed is that every $1 decline a family suffers in its portfolio will trim spending by 3 cents. As a result, Fed forecasters now believe that if U.S. stocks stay close to current prices for the rest of the year, U.S. growth--which has been running above 3% a year--will fall to 2.5% or less next year, a rate policymakers feel is sustainable without rekindling inflation.
Indeed, in the wake of the recent turmoil, Greenspan is telling confidants he believes the long-term outlook for the U.S. economy is quite favorable. He is heartened that the economy was able to swallow a hike in the federal minimum wage without so much as an inflationary hiccup. And he is still convinced that productivity is rising much faster than the measured rate. That could mean higher corporate profits that would bolster the stock market and less worry about wage inflation during a time of tight labor markets.
If anything, Greenspan is hoping that U.S. stock prices will stabilize. And if the market were to fall a little more, the Fed chief wouldn't lose any sleep over it.
By Dean Foust in Washington