A Speech We'll Never Hear from Alan Greenspan

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WASHINGTON -- Despite his reputation for deliberate opacity, Alan Greenspan, the Federal Reserve chairman, actually speaks quite directly about the outlook for the economy and interest rates. Still, there may be limits to any Fed chairman's forthrightness. Rest assured that when he goes before the Senate Banking Committee on Tuesday for the first round of this year's Humphrey-Hawkins testimony, he will not say the following, no matter how much he might want to.

Thank you. I always enjoy this opportunity to indulge members of Congress in the fantasy that they understand monetary policy, and to prepare Wall Street for the next trick up my sleeve.

Let's start by reviewing 1998. You might remember me saying in September that no nation could remain an oasis of prosperity unaffected by what was going on in the rest of the world. Boy, was I wrong! Japan remains in the tank, and the rest of Asia is only starting to breathe on its own. Emerging economies from Russia to Brazil are already in free fall or teetering on the brink. Europe is doing nothing to help, and may itself be headed for a downward slide. Yet the American economy is not only shrugging off the rest of the world's woes, it is also showing remarkable strength. The economic growth rate in the fourth quarter -- 5.6 percent, annualized -- may wind up being revised downward somewhat. But heading into 1999 the United States was not just an oasis, it was a veritable economic Garden of Eden. Speaking of sin, I'll confess to my own. That last interest rate cut -- the quarter-point reduction in the federal funds and discount rates in November -- was a mistake. The economy certainly didn't need it. And while I'm sure my central-banker friends around the world appreciated it, its main effect at home was to send stocks higher. I really should have held off, keeping that quarter point in my ammo belt just in case Brazil melts down or some other conflagration breaks out in the global financial system, and we need another shot of monetary easing. Now, if I have to cut rates further, Wall Street is going to spurt up into cloud-cuckoo-land. Everyone knows my feelings about equity valuations, but let me try this one more time: You people are bonkers if you think earnings are going to hold up over the next year, much less increase at a double- digit pace. So if you're buying on the basis of price-to-earnings multiples, stop deluding yourselves -- you're all day traders now. Since we central bankers have to consider all the possibilities, let's look at another: that growth remains so strong this year that the hawks start agitating for a rate increase to head off any chance of inflation taking root. …