Byline: ANDREW ALEXANDER
AS AN exercise in analysing the American economy, Federal Reserve chairman Alan Greenspan's testimony to Congress yesterday was lucid and thought-provoking. As an attempt to take the heat out of the US stock markets, it flopped.
True, Wall Street lost 115 points (less than 1 1 / 2 pc) when it heard Greenspan's twice-yearly 'Humphrey Hawkins' review. But there have been 10 similar or larger falls so far this year, often related to quite modest events.
Moreover, that was the maximum impact of the day. Wall Street closed down 83.25 points at 8095.06.
Greenspan once jested that if his audiences had a clear view of what he was thinking, he was not doing his job properly.
Yesterday, there were no ambiguities in his testimony. The strong performance of the labour market 'suggests the economy has been on an unsustainable track'. It was not possible to go on 'digging ever deeper' into the available working population without wages rising.
At the current rate, job recruitment could produce 'rapid escalation' of wages. It was only a question of when, not whether, this was likely to happen.
Employees have hitherto been readyto sacrifice pay levels for job security but that trend is ending. Without a sharp and unlikely rise in productivity growth, inflation would start to rise the greatest threat to economic growth.
His message to Wall Street was: 'It clearly would be unrealistic to look for a continuation of stock market gains of anything like the magnitude of those recorded in the past couple of years.' Price earnings ratios were unrealistic, he suggested. In addition, the Federal budget outlook was less sound than generally appreciated.
He could hardly have been more explicit. He will have to raise interest rates. And presumably by more than March's 0.25pc which had but the briefest impact on what he had called 'the irrational exuberance' of the stock market.
US Treasuries fell on his comments and gilts with them. …