Originally created 07/25/99

Greenspan's words rattle markets

NEW YORK -- Two things that scare most people are heights and speed, and both are factors in today's economy. The stock market is at an all-time high and the economy is racing ahead.

Add still another factor in explaining the jitters that some folks are beginning to exhibit: It is stability, as in an economy that grows with little inflation, plenty of jobs and rising profits.

Having lived through recessions, double-digit inflation and mass layoffs, older Americans are unaccustomed to equilibrium, as apparently exists today. "Apparent" because -- well, you never can be certain.

It is this uncertainty that is now becoming evident, and nothing demonstrates it better than the exaggerated movements of the stock market at the slightest hint of good news or bad, such as when Federal Reserve Chairman Alan Greenspan coughs.

Greenspan provides Congress with at least a twice-a-year interpretation of the economy, usually accompanied by some hint of future Fed policy. He did that last on Thursday.

After characterizing the economy as "exceptional," the chairman said that if inflation resurfaced, "the Federal Reserve will have to act promptly and forcefully ... ."

For Greenspan to act promptly and forcefully could mean only one thing -- an interest rate increase that would weigh down the economic expansion and the price of stocks that reflected the expansion.

That unnerved some investors, especially in some of the high-flying technology stocks, who quickly sold. Nothing new in that; selling on the slightest bit of news has become the mark of nervous investors.

So pronounced has the pattern become, that those with sturdier nerves now often time their purchases to take advantage of sudden price declines. They are usually younger, having been patterned in better times.

Greenspan's influence on investors -- his power to encourage or strike fear in them -- is one of the most remarkable personality characteristics of the 1990s economy. His slightest hint becomes a directive for some.

In this instance, it wasn't even a hint. He had said many times before that if economic data suggested the likelihood of inflation he would act promptly. That he said it again was only because it's his job to do so.

In contrast to the importance investors place on Greenspan's words (or, at least, older investors do) is the fearlessness with which his words and worries are ignored by other segments of the public.

Consumers (younger ones, at least) are running up debts for electronic gadgetry, cars and vacations as if downturns belonged only to the past. And, based on zero savings, pre-retirees no longer seem to fear old age.

This, in turn, worries the dickens out of other folks, especially those with long memories of recessions and a cautiousness above the future. This, they ask, is what we call economic stability?

Their questions and fears are becoming more visible. What will spenders do when unemployment rises, as most certainly it could? How will they repay their loans if they don't have jobs? Or if mortgage rates rise?

One of the many amazing powers of Greenspan is that while he rarely changes his view, his words always have an impact on stocks, if only for a day or a week or so, whereas real indicators of the future are ignored.

This is especially so when you consider that in this latest instance the Fed clearly revealed its hand, predicting that on its own the economy is likely to slow next year by as much as a full percentage point.

And if that outlook proves to be accurate, it is hardly likely that the Fed will raise rates. In short, the chairman said very little, but don't tell that to jittery investors.


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