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News > Economy
Fed chief: prices still low
June 20, 2001: 1:12 p.m. ET

Greenspan addresses inflation risk, productivity, state of banking industry
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NEW YORK (CNNfn) - Federal Reserve Chairman Alan Greenspan said Wednesday he saw little inflation pressure on the United States economy, an encouraging sign for some who hope the Fed will cut interest rates again to boost the world's largest economy.

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Greenspan, speaking at a Senate Banking Committee hearing, said high unit labor and energy costs have not had a "material" effect on the prices of finished goods -- though they have eroded corporate profits -- and he said the Fed needs to be "very careful" about the risk of inflation.

"History has told us time and time again that the most effectively productive economies are those with stable prices," Greenspan said.

Greenspan said the best measure of consumer inflation is the personal consumption expenditure component of the gross domestic product report prepared by the Commerce Department.

"Core" inflation -- which excludes volatile food and energy prices -- has been "relatively stable" and shows no sign of accelerating, Greenspan said.

The Fed meets June 26 and 27 to decide whether to cut short-term interest rates for the sixth time this year in an effort to breathe life into the sluggish U.S. economy.

Consumer spending, productivity strong

The Fed already has cut rates by 2.5 percent to 4.0 percent, but it would stop its rate-cutting campaign if it were worried about pumping too much money into the economy and risking inflation. Greenspan's comments at least indicate that inflation is not a barrier to further rate cutting next week.

Prices of interest-rate sensitive U.S. Treasury bonds rose as Greenspan spoke, though he did not directly address interest rate policy.

Greenspan acknowledged that the recent tide of job layoffs "has got to be a factor in determining the propensity of people to spend money," as it affects consumers' confidence.

However, he added, there hasn't been "any serious deterioration" in spending by consumers, a more important benchmark than how confident they feel.

Greenspan also said that persistently low U.S. savings levels have not hindered productivity growth due to the effective use of the savings that exist, and that a dip in productivity in the first quarter of 2001 was not likely to be repeated in the second quarter.

"We have managed to use a very limited amount of savings in a very effective way," Greenspan said. "In part because of our financial system and indeed our banking system in general, we have been able to direct the limited savings that we do have into the most effective uses. In that regard, one must look at the American banking system as a very major player in our ability to improve productivity."

Banking system tight-fisted

Still, the sagging economy has brought more problem loans and made bankers fairly tight-fisted, Greenspan said. He cited problems in retailing and manufacturing and among California utilities.

Bank regulators "need to be more sensitive to problems at individual banks, both currently and in the months ahead," Greenspan said, also noting weaknesses in the health care and telecommunications industries.

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  We are fortunate that our banking system entered this period of weak economic performance in a strong position.  
     
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  Alan Greenspan
Federal Reserve Chairman
 
"We are fortunate that our banking system entered this period of weak economic performance in a strong position," Greenspan said.

At the same time, the central bank chief reiterated his statement last month that bankers and regulators are getting better at reducing risks, and in breaking a cycle of tighter lending in a slumping economy and expanded credit in a recovery.

"It is not an easy road, but it seems that we are well along it," Greenspan said.

Greenspan's remarks come as personal debt is at an all-time high, and the amount of income Americans are dedicating to paying it down is at levels unseen in 15 years. Mortgage delinquencies and write-offs by credit card companies are rising, and personal bankruptcy filings could hit a record this year.

In an earlier speech, Greenspan told a summit on the 21st century work force sponsored by the Labor Department that an increasingly technological society requires the nation's educational system to be flexible to help workers meet new challenges.

The days when a high school or college education would serve a person throughout his working life are gone, he said, adding "learning will increasingly need to be a lifelong activity."

Demands placed on employees amid an ever-changing, high-technology workplace will mean that workers will continually need to learn and master new skills, Greenspan said. graphic


- from staff and wire reports

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