Greenspan:
Stock turmoil has a benefit

He says it may dampen inflationary pressures;
stock prices push higher

Bruce Meyerson

Associated Press

WASHINGTON -- The wild gyrations in the stock market in recent days could have a long-run benefit for the U.S. economy by slowing growth to a sustainable pace and dampening inflationary pressures, Federal Reserve Chairman Alan Greenspan said today.

"Things are less out of line" in the aftermath of Monday's market drop, Greenspan told the congressional Joint Economic Committee.

The remarks by the man who less than a year ago warned against "irrational exuberance" on Wall Street helped send stock prices higher, fueling a rally begun yesterday.

The Dow Jones industrial average, which rose as much as 123 points as Greenspan testified before Congress shortly after the opening of trading, later gave up those gains and at times traded in negative territory. It closed the day up 8.35 points at 7,506.67. The Nasdaq Stock Market was barely changed.

"Provided the decline in financial markets does not cumulate, it is quite conceivable that a few years hence we will look back at this episode, as we now look back at the 1987 crash, as a salutary event in terms of its implications for the macroeconomy," Greenspan said. Even with yesterday's market rebound, he said, consumers feel less wealthy than they did a week ago and this will dampen spending.

"What the markets didn't hear was more important than what they did hear today," said David Wyss, economist at DRI-McGraw Hill Inc. "The market was worried that Greenspan would warn once again that growth was unsustainable or inflation was dangling like a thin thread over our heads. He didn't say anything like that."

Wyss said Greenspan's comments today convinced him that the central bank will leave interest rates unchanged for the rest of the year.

Greenspan said the currency and market turmoil that has afflicted several Southeast Asian nations since July did not present a serious threat to the U.S. economy. But he said that it is important for the United States and multinational lending agencies such as the International Monetary Fund to help the region.

"It is in the interest of the United States and other nations around the world to encourage appropriate policy adjustments, and where required, provide temporary financial assistance," Greenspan said.

As did President Clinton yesterday, Greenspan declared that the underlying U.S. economy remained strong despite the market turbulence of the past week. The Dow Jones industrial average plummeted a record 554 points on Monday and regained a one-day record 337 points yesterday.

Greenspan expressed satisfaction that stock prices in the United States and around the world were now lower than they were just a week ago.

Greenspan said that even if turmoil in Southeast Asian markets had not led to the big sell-off on Wall Street, some other event eventually would have driven down a market that had climbed too high.

All the turmoil had to be viewed against the backdrop of a "continuing impressive performance of the American economy in recent months. Growth appears to have remained robust and inflation low, and even falling, despite an ever-tightening labor market," Greenspan said.

But he said the Fed must remain vigilant to insure that tight labor markets do not cause inflation.

Earlier this month, Greenspan sent stock markets tumbling with worries that the current pace of economic growth was unsustainable, raising prospects that the central bank would soon begin raising interest rates in a bid to dampen consumer and business spending.

On Wall Street today, advancing issues outnumbered decliners by a 9-to-5 margin on the New York Stock Exchange, with 1,984 up, 1,091 down and 369 unchanged.

NYSE volume totaled 770.62 million shares, down from 1.196 billion yesterday.

The Standard & Poor's 500-stock list fell 2.69 to 919.16 and the NYSE composite index rose 0.27 to 482.93. The Nasdaq composite index slipped 0.67 to 1,602.35 and the American Stock Exchange composite index rose 5.87 to 676.41.

The price of the Treasury's main 30-year bond was up 1 4/32 point, or $11.25 per $1,000 in face value, by last afternoon, while its yield dropped to 6.21 percent from 6.28 percent late yesterday. Prices and yields move in opposite directions.

Before the opening, traders grew confident that the market's record gain of the day before might hold up when Hong Kong investors sent the main index there up nearly 19 percent overnight.

The rally spread to Tokyo stock market, which rose 3.3 percent, and London, where the main index was up 2.2 percent by late afternoon.

Analysts warned more huge price swings were likely.

"It's not over yet," said Bronwyn Curtis, chief economist at Nomura International in London.

"There's room still for quite a lot of volatility."

London's blue-chip Financial Times-Stock Exchange 100-share index closed with a gain of 116.4 points, or 2.4 percent, at 4,871.8.

"I don't think anybody can be sure if it's a real recovery until we see it last more than a day," agreed Michael Saunders, an economist at the investment firm Salomon Brothers on London.

"There's too many possible hurdles to cross to be sure."

Even after its rebound today, Hong Kong's market remained well below the level that it had started the previous week, before a speculative attack on its currency triggered interest rate increases that hurt corporate prospects. Speculators judged Hong Kong's dollar overvalued compared to Southeast Asian currencies.

Of the past eight trading days in Hong Kong, six saw sharp declines and only two produced gains, for a cumulative loss in value of 20 percent. The market at today's close was 35 percent below its value on Aug. 7, when it peaked at 16,673.27.

Bond prices rallied on Greenspan's comments, sending the yield on the benchmark 30-year Treasury bond down to 6.23 percent from 6.29 percent yesterday.