01/19/98 WHAT GREENSPAN REALLY MEANT

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WHAT GREENSPAN REALLY MEANT

Federal Reserve chairmen are exceedingly circumspect in their public utterings. So on Jan. 3, when Alan Greenspan delivered a speech on deflation for the first time, Wall Streeters gasped. Concluding that the Fed was suddenly more concerned about falling prices than inflation, traders sent bond prices soaring in anticipation of a rate cut. Greenspan ''was clearly setting the stage for an easing of monetary policy,'' surmised Brian S. Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson Inc. in Chicago.
But investors betting on the Fed to lower rates may be disappointed. That's not the signal Greenspan intended to send. The Fed chief's real message: Falling prices don't bother him so long as they're the result of productivity gains--particularly in high-tech industries. Rather than fretting about deflation, Greenspan has indicated in private conversations that he believes the economy, for now at least, is in a golden zone of price stability that would make any Fed move unlikely. Just four months ago, he was leaning toward a rate boost. But the Asian financial crisis has left Greenspan neutral about the central bank's next step.
So why did he raise the specter of deflation? To allay growing concerns that a downward price spiral triggered by Asia's woes might harm the U.S. economy. Indeed, while he's concerned about the Asian situation, the Fed chairman welcomes its moderating effects on the fast-growing U.S. economy.
And, at this point, Greenspan is not concerned about deflation per se. He has pointed out that the U.S. enjoyed an economic renaissance between the 1870s and 1890s even as the country was experiencing a sharp decline in goods prices. Also, Greenspan noted in his Jan. 3 speech that he would only be concerned about deflation if stock and commercial property prices were to tumble sharply--something he doesn't see in the cards. He has told confidants that as long as stock and other asset prices hold up, he won't panic, even if the consumer price index starts falling.
SALAD DAYS. Just over a year ago, Greenspan fretted about overvalued stocks in his famous ''irrational exuberance'' speech. But since then, continuing strong profit growth has allayed his fears. Earnings may not have risen quite enough to justify current stock prices, in Greenspan's mind, but they're closing the gap.
Most important, Greenspan remains bullish about the U.S. economy. He sees few signs of weakening domestic demand and believes the inflationary pressures of tight labor markets are being offset by productivity gains and the effects of the Asian turmoil. As a result, the U.S. is enjoying a rare, blissful period of flat prices--though how long it will last, he won't speculate.
While some economists gripe that, given such low inflation, ''real'' interest rates remain high, Greenspan sees no need to cut as long as rate-sensitive businesses such as housing and autos aren't suffering.
The main risk to the economy, in Greenspan's mind remains: tight labor markets. In recent years, wage inflation has been muted by corporate downsizing and workers' willingness to trade raises for job security. But Greenspan worries that the shrinking pool of unemployed workers will inevitably mean higher wages. And he is poised to raise rates if pay hikes start outstripping productivity gains.
For now, however, he remains optimistic that productivity gains, especially from information technology, will keep costs in check. He's so convinced of the productivity revolution that he has discounted in advance an expected weak productivity report for the fourth quarter as flawed by statistical noise.
If productivity gains persist, he believes, the U.S. economy is entering a virtuous cycle in which inflation remains low and companies continue to boost productivity because they can't raise prices. If he's right, the Fed chief may spend 1998 on the sidelines.
By Dean Foust in Washington

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