Fed Chairman Warns Stock Investors Again EXUBERANCE REVISITED

Article excerpt

For a man known for obfuscation, Alan Greenspan is becoming increasingly blunt.

The chairman of the Federal Reserve delivered a sharp warning yesterday on the dangers of an overheated stock market - the third in three months. His message is raising new concerns that the central bank will at some point increase interest rates if the market doesn't settle down.

"The stock market needs to pay more attention to what he is saying," says Lyle Gramley, consulting economist of the Mortgage Bankers Association and a former Fed governor. "If this doesn't do it, there will be blunter warnings later." At least temporarily, the market did pay heed. After his remarks to the Senate Banking Committee, stock prices dipped sharply. The Dow Jones industrial average fell more than 100 points, before recovering somewhat as Wall Street analysts quickly assured investors that the central bank head was saying nothing much new from testimony earlier this month and in December. "I don't think there is any new substance in this report," said Steven Ricchiuto, an economist with Dean Witter Reynolds Inc., New York, after reading Mr. Greenspan's written testimony. "The tone is worse than the actual substance." Mr. Gramley, however, predicts that if investors continue to drive up prices, the Fed will first raise the margin required when shareowners buy stock on credit. Then, if the market doesn't cool, he expects the policymaking body of the Fed, the Open Market Committee, to raise interest rates. The first regular opportunity to do so will come when that body next meets March 25. What concerns Gramley is that stock prices will rise so much that this distortion will put the economy itself at risk. He notes how Greenspan, in his testimony to Congress Dec. 5 with his now-famous question about whether "irrational exuberance" was driving the market, pointed to Japan's economy, which remains troubled five years after its stock-market bubble burst. …