Federal Reserve Chairman Alan Greenspan said Friday that the Fed must focus more on surging stock prices and home values as it sets monetary policy.

That could imply further rate hikes are in the offing if the markets do not cool of their own accord.

Mr. Greenspan's speech at an international conference organized by the Federal Reserve Bank of Kansas City went further than his December 1996 "irrational exuberance" comment about the stock market, which triggered a dramatic selloff.

On Friday the reaction was more muted, perhaps because he took a more detached, academic tone. The Dow Jones industrial average fell 0.97%, and interest-sensitive bank stocks performed similarly. But some observers said Mr. Greenspan took his argument to the next level.

In 1996 "he got a lot of flak for talking about the stock market," said Sung Won Sohn, chief economist at Wells Fargo & Co. Now "he is saying it is a legitimate economic variable that the Fed should be looking at in the conduct of economic policy. He is sending a message to the market that rates will go up higher."

Factoring asset values into its policy-setting equation would represent a sea change for the Fed, which has traditionally focused on consumer price and employment data, Mr. Sohn said. Rising rates typically hurt banks in the stock market because investors believe they cut into the profit on loans.

Mr. Sohn said Mr. Greenspan is "nonplussed" that stocks have not come down after two rate hikes this year. The Fed chief is continuing his "open mouth policy" in hopes of letting some of the air out of asset values -- for fear that the alternative is a more painful, sudden dislocation.

"I am convinced that the Fed wants to deflate some of the enthusiasm in the stock market and the housing market," Mr. Sohn said. "It is not so much that higher prices are bad. The concern is about the other side of the mountain. Sooner or later, corrections will come."

Mr. Greenspan perceived "waves of optimism and pessimism that can be touched off by seemingly small exogenous events" such as last year's Russian debt default.

"As the value of assets and liabilities has risen relative to income, we have been confronted with the potential for our economies to exhibit larger and perhaps more abrupt responses to changes in factors affecting the balance sheets of households and businesses," Mr. Greenspan said. "As a result, our analytic tools are going to have to increasingly focus on changes in asset values and resulting balance sheet variations if we are to understand these important economic forces."

Mr. Greenspan is concerned that consumers, giddy with stock market optimism, are spending too much and saving too little, Mr. Sohn said, and that that will cause inflation. Benign inflation data have constrained the Fed from raising rates more forcibly, he said, and Mr. Greenspan is now saying that policy makers must look at stock prices, in addition to the usual data, as a leading indicator of inflation.

Home value is another area that "clearly warrants further examination," Mr. Greenspan said. "It is evident that borrowings against capital gains on homes influence consumer outlays beyond the effects of gains from financial assets.

"Preliminary work at the Federal Reserve suggests that extraction of equity from housing has played an important role in recent years. However, stock market values and capital gains on homes are correlated, and hence their separate effects are difficult to identify."

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