Greenspan: economy to ride out oil prices

Federal Reserve Chairman says surge in prices will have less consequence than in ‘70s, notes prices have calmed recently

Jeannine Aversa

Associated Press Economics Writer

The U.S. economy, which had hit a temporary soft patch from surging energy prices, probably will weather the situation well, Federal Reserve Chairman Alan Greenspan suggested May 20.

“The effect of the current surge in oil prices, though noticeable, is likely to prove less consequential to economic growth and inflation than in the 1970s,” the Fed chief said in a speech to the Economic Club of New York.

A copy of his speech was distributed in Washington.

Greenspan, in a largely upbeat assessment, noted that oil and gas prices have calmed down a bit recently. Private inventories of crude oil in the United States have climbed to their highest level in three years, helping to damp the recent “price frenzy,” he said.

In a question and answer session after his speech, Greenspan said he believes China will eventually revamp its currency system, which critics have blamed for the United States’ bloated trade deficits. The administration has recently stepped up pressure on Beijing to stop linking its currency, the yuan, to the U.S. dollar.

The yuan “will be at some point revalued upward, but I will not necessarily put a number on it,” he said. He once again said China’s current system represented an increasing threat, including higher inflation, to the Chinese economy.

A revaluation by the Chinese may not help the U.S. trade deficit, he said. “Indeed it’s probably quite unlikely,” he said. U.S. retailers would probably shift to other countries — not necessarily U.S. producers — for goods. “So essentially what we will find is we’re importing from a different area, but we will be importing the same goods.”

Greenspan hopes for conservation

Oil prices skyrocketed into record territory in March and closed at a new peak of $57.27 a barrel at the beginning of April. Prices have since retreated and now are above $47 a barrel (as of May 20).

President George W. Bush has called on Congress to produce a comprehensive energy bill by August. The House passed a bill last month, but its prospects in the Senate — where energy legislation died two years ago — remain uncertain.

Greenspan also repeated his interest in letting market forces help stabilize prices. He said any response by policy-makers should not “distort or stifle the meaningful functioning of our markets.”

The economy in March, as well as in the spring of last year, slipped into temporary soft spots, developments blamed mostly on jumps in energy prices.

While price spikes are always a concern, Greenspan indicated that the country is in a better position than in the past to withstand them. Thus, he didn’t believe the country would see a repeat of the oil shocks of the 1970s and early 1980s that set off a series of recessions.

The United States these days is more energy-efficient, he said.

In his speech, Greenspan did not address the future course of interest rate policy. To prevent inflation from becoming a danger to the economy, the Federal Reserve has boosted short-term interest rates eight times — each in modest, quarter-point moves — since last June.

Economists believe the Fed will bump up rates again at its next meeting at the end of June and probably through much of this year.