Tags: Did | Greenspan | Ignore | Recession | Warning?

Did Greenspan Ignore Recession Warning?

Wednesday, 05 April 2006 12:00 AM

At a 2000 Federal Reserve interest-rate meeting, the agency's chief forecaster Michael Prell warned that a potential economic collapse was on the horizon - but his prediction fell upon deaf ears.

It turned out to be Prell's last meeting at the Fed - and then-Fed Chairman Alan Greenspan seemingly ignored his observations and went on to raise rates.

Prell's warning was revealed Wednesday, as the Fed released transcripts of the session from May of that year. While a policy statement is offered immediately after each Fed meeting, actual transcripts of the minutes are published on a five-year lag.

"What lies ahead is certainly less attractive than the landscape of the past few years," Prell, former head of the Fed's research and statistics division, said, according to transcripts. He referred to an economic "deluge" resulting from the bursting of a stock-market bubble.

After three straight years of more than 4% growth, officials at the time were desperate to slow the economy without causing unemployment or damaging the stock market.

"Later figures would show the economy grew at a 6.4% annual rate in the second quarter of 2000, prompting Greenspan and the Fed's rate committee to press for ways to control inflation," according to Bloomberg.

Contradicting Prell's analysis, Greenspan implemented a half-point rate hike - the Fed's sixth in its past eight meetings - bringing the benchmark up to 6.5%.

Of course, by the beginning of 2001, the U.S. was in the grips of recession, as the Nasdaq had plummeted by 64% and the S&P 500 had dropped 25%. That prompted the Fed to set in motion a massive slashing of rates in January 2001.

"The committee held a teleconference to approve a half-point cut, the start of a 5 1/2-percentage point reduction in the fed funds rate over 2 1/2 years," Bloomberg reports.

"The move's timing surprised almost anyone who wasn't at the Dec. 19 rate meeting, where Greenspan said the Fed, if necessary, would make such a cut in the first two weeks of January."

According to the transcripts, two Fed presidents at the meeting suggested the adoption of a strategy known as the numerical inflation objective. Essentially, that means that if a central bank or government says that inflation should be within a range of between 1.5% and 2.5%, it will actively seek to set monetary policy to achieve that rate.

But Greenspan shot that down - because he didn't feel there was enough evidence to prove to Congress that such a strategy would be effective.

Speaking to a business group in Parkersburg, W. Va., Richmond Federal Reserve Bank President Jeffrey Lacker told those assembled that the economy is going great guns and inflation is in check.

"Growth is proceeding on a solid pace this year, and inflation is low and stable," Lacker said in his speech. "It has now become uncontroversial to say that the outlook for overall economic activity is quite healthy."

Lacker noted that while the U.S. housing market will slow down in 2006, it won't be as sharp a reduction as some might believe. It also won't have much of an impact on the overall economy.

"(Housing) will not pose a problem for overall activity this year or next," Lacker said. He told the group that he viewed a housing slowdown not as a "precipitous decline, but rather as a return to more normal conditions in many markets."

"Moreover, I don't see diminished housing-price appreciation as a major problem for consumer spending, since again, the primary determinant of spending is income, and we see solid and improving prospects for real incomes for the nation as a whole," Lacker said.

Lacker added that household debt is not as big a problem as economists have insisted it is. He also said that increased business investment would more than make up for any fall in housing prices. "I expect investment spending to be quite robust this year," he said.

Earlier this year, Lacker had forecast 3.5% growth for the U.S. economy in 2006. That shouldn't change, he told the audience - especially if inflation continues to "look fairly good."

"Both survey data and the market prices of inflation-protected Treasury securities tell us that the public expects inflation to continue to be contained. I am confident that we at the Fed have the knowledge and the will to validate those expectations," Lacker said.

U.S. firms are shying away from cutting staff, with March workforce reductions at an 11-year-low, according to the job-placement firm Challenger, Gray & Christmas.

According to the company, which tallies U.S. job growth numbers on a month-to-month basis, layoffs in March totaled 64,975, down 26% from February's 87,437 and 25% from 86,396 in March 2005.

Layoffs for the first quarter as a whole fell by 11% from the fourth quarter to 255,878. Quarterly layoffs were also down 11% from a year ago.

"The labor market is quickly getting to the point where we will see upward pressure on wages, as employers attempt to attract more workers and retain the ones they have," said John Challenger, CEO of Challenger, Gray & Christmas.

Telecom companies, thanks to a host of new mergers, saw the most job losses - 11,047, according to Challenger. Manufacturing companies cut 9,668 jobs, the firm adds.

It's worth noting that Challenger's numbers don't cover smaller companies, whose numbers would obviously add to overall U.S. job cuts.

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At a 2000 Federal Reserve interest-rate meeting, the agency's chief forecaster Michael Prell warned that a potential economic collapse was on the horizon - but his prediction fell upon deaf ears. It turned out to be Prell's last meeting at the Fed - and then-Fed Chairman...
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Wednesday, 05 April 2006 12:00 AM
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