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
Tuesday for the first round of this year's Humphrey-Hawkins
testimony, he will not say the following, no matter how much he
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
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
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. …