Financial markets took wing dramatically on the economic optimism recently offered by Alan Greenspan in his semiannual report to Congress.
But was the customarily cautious Fed chairman really all that exuberant? Upon further review, several economists said they think he actually issued important warnings about future business conditions.
"Mr. Greenspan's Humphrey-Hawkins testimony is remembered as a benign speech that put the Fed's blessing on the bull market," said senior economist Christopher Low of HSBC Markets Inc., New York.
"In fact he warned that economic growth in the third quarter would likely fall somewhere between the first quarter's unmitigated strength and the second quarter's moderation," Mr. Low noted. "He said that there was a distinct risk that demand might be too strong, and he said that, if it was, the Fed would hike rates."
The nation's gross domestic product rose at a 6% annual clip during the first quarter but then decelerated to less than half that pace in the second quarter. Several third-quarter signs reveal new strength.
The part of the Fed chairman's testimony getting the most attention is this statement: "The recent performance of the economy, characterized by strong growth and low inflation, has been exceptional-and better than most anticipated."
But he also said this: "For the present ... demand growth does appear to have moderated, but whether that moderation will be sufficient to avoid putting additional pressures on resources is an open question. With considerable momentum behind the expansion and labor market utilization rates unusually high, the Federal Reserve must be alert to the possibility that additional action might be called for to forestall excessive credit creation."
And he forcibly denied that the central bank is playing a game of chicken with monetary policy.
"The Federal Reserve is intent on gearing its policy to facilitate the maximum sustainable growth of the economy, but it is not, as some commentators have suggested, involved in an experiment that deliberately prods the economy to see how far and fast it can grow.
"The costs of a failed experiment," he said, "would be much too burdensome for too many of our citizens."
More specifically, he said that the Fed is still vigilantly scanning the economic horizon for inflationary hot spots.
"The current lack of material shortages and bottlenecks-despite the high level and recent robust expansion of demand - is striking," he acknowledged, but his further remarks raised eyebrows among some seasoned observers.
"Even so, today's economy as a whole still can face capacity constraints from its facilities," Mr. Greenspan counseled. "Indeed, just three years ago, bottlenecks in industrial production-though less extensive than in years past at high levels of measured capacity utilization-were nonetheless putting significant upward pressures on prices at earlier stages of production."
Then he warned: "More recently vendor performance has deteriorated somewhat, indicating that flexibility to meet demands still has limits."
A few days after the Fed chairman's remarks, the latter concern was underlined by the slower pace of July deliveries reported in the monthly survey by the National Association of Purchasing Managers-one of Mr. Greenspan's favorite bottleneck indicators.
