Statement by Alan Greenspan, Chairman, Board of Governors of the Federal Reserve System, before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, February 23, 1999
Greenspan, Alan, Federal Reserve Bulletin
(Chairman Greenspan presented identical testimony before the Committee on Banking and Financial Services, U.S. House of Representatives, February 24, 1999.)
I appreciate the opportunity to present the Federal Reserve's semiannual report on monetary policy.
The U.S. economy over the past year again performed admirably. Despite the challenges presented by severe economic downturns in a number of foreign countries and episodic financial turmoil abroad and at home, our real gross domestic product grew about 4 percent for a third straight year. In 1998, 2 3/4 million jobs were created on net, bringing the total increase in payrolls to more than 18 million during the current economic expansion, which late last year became the longest in U.S. peacetime history. Unemployment edged down further to a 4 1/4 percent rate, the lowest since 1970.
And despite taut labor markets, inflation also fell to its lowest rate in many decades by some broad measures, although a portion of this decline owed to decreases in oil, commodity, and other import prices that are unlikely to be repeated. Hourly labor compensation adjusted for inflation posted further impressive gains. Real compensation gains have been supported by robust advances in labor productivity, which in turn have partly reflected heavy investment in plant and equipment, often embodying innovative technologies.
Can this favorable performance be sustained? In many respects the fundamental underpinnings of the recent U.S. economic performance are strong. Flexible markets and the shift to surplus on the books of the federal government are facilitating the buildup in cutting-edge capital stock. That buildup in turn is spawning rapid advances in productivity that are helping to keep inflation well behaved. The new technologies and the optimism of consumers and investors are supporting asset prices and sustaining spending.
But after eight years of economic expansion, the economy appears stretched in a number of dimensions, implying considerable upside and downside risks to the economic outlook. The robust increase of production has been using up our nation's spare labor resources, suggesting that recent strong growth in spending cannot continue without a pickup in inflation unless labor productivity growth increases significantly further. Equity prices are high enough to raise questions about whether shares are overvalued. The debt of the household and business sectors has mounted, as has the external debt of the country as a whole, reflecting the deepening current account deficit. We remain vulnerable to rapidly changing conditions overseas, which, as we saw last summer, can be transmitted to U.S. markets quickly and traumatically. I will be commenting on many of these issues as I review the developments of the past year and the prospects going forward. In light of all these risks, monetary policy must be ready to move quickly in either direction should we perceive imbalances and distortions developing that could undermine the economic expansion.
A hallmark of our economic performance over the past year was the continuing sharp expansion of business investment spending. Competitive global markets and persisting technological advances both spurred the business drive to become more efficient and induced the price declines for many types of new equipment that made capital spending more attractive.
Business success in enhancing productivity and the expectation of still further, perhaps accelerated, advances buoyed public optimism about profit prospects, which contributed to another sizable boost in equity prices. Rising household wealth along with strong growth in real income, related to better pay, slower inflation, and expanding job opportunities, boosted consumption at the fastest clip in a decade and a half. The gains in income and wealth last year, along with a further decrease in mortgage rates, also prompted considerable activity in the housing sector. …