High energy prices pose a danger to the long-running economic expansion, Federal Reserve Chairman Alan Greenspan said yesterday, though they have not yet created a wider inflation problem or hurt consumer spending.
In a speech at the Cato Institute that focused for the first time on the broad implications of the threefold increase in oil prices since last year, Mr. Greenspan said the central bank is increasingly preoccupied with OPEC, the Middle East and the ups and downs of oil prices.
“Policy-makers will need to be on the alert for oil-driven indeed, energy-driven risks to our expansion,” he said. “Even though the intensity of oil consumption is markedly below where it was 30 years ago, it still has the potential to alter the forces governing economic growth in the United States.”
Political tensions in the Middle East are keeping crude prices high hovering around $34 a barrel yesterday despite decisions this year by the Organization of the Petroleum Exporting Countries to increase output to record levels, he said.
And at this point, OPEC has little extra capacity to keep adding oil to meet the robust demand in the United States, he said.
The financial markets are worried about disruptions in oil supplies largely because Iraq might make a “politically driven” decision to withdraw some or all of the 2.5 million to 3 million barrels it ships each day, he said.
Analysts say Iraq may do that to show solidarity with Palestinians in their conflict with Israel.
The fear has led to some hoarding in the United States, Mr. Greenspan said.
With supplies at 24-year lows, consumers and businesses appear to be snapping up supplies ahead of time to guard against a cold winter, adding to the pressure on prices, he said.
Still, despite the nationwide state of high alert on energy, he said, the effect on inflation expectations “has been nil,” and “the growth of consumer spending has remained firm.”
“To date, the spillover from the surge in oil prices has been modest,” he said.
Mr. Greenspan held out the hope that oil prices will finally subside after the winter traditionally the high season for use of heating oil is over, limiting the damage to the economy.
His comments, which noted that robust growth of productivity also continues to hold down inflation, overall were taken as a positive sign by the financial markets, which have feared the Fed would see high energy prices as a reason to raise interest rates again this year.
Aided by the Greenspan speech, the beleaguered Nasdaq Composite Index soared 247 points to 3,419 its third-largest gain ever and the Dow Jones Industrial Average jumped 168 points to 10,143.
“I think the chairman painted an extremely rosy picture of the overall economy and that the only fear on the radar screen is higher-priced oil,” said economist Richard Yamarone of Argus Research Corp. “The warning flags are up and the Fed will be watching that with great interest.”
Mr. Greenspan praised the recent strong gains in worker productivity that have been “so essential to containing price increases” because they have allowed “businesses to absorb rising compensation increases.”
In a separate speech in St. Louis, Fed board member Laurence Meyer also emphasized that the rapid growth of productivity has held off inflation so far.
Soaring oil prices have contributed to inflationary pressures in the short term, he said, but are likely to decline by spring.
Mr. Meyer suggested that a drop in productivity growth would pose a more serious problem for the economy than oil prices.
“A deceleration in productivity would bring with it the reverse of [today’s] favorable conditions,” he said. “The choices may become less favorable specifically some combination of slower growth and perhaps higher inflation.”
The economy may be in transition to such slower growth right now, he said. “We might be approaching a type of soft landing.”
Mr. Greenspan added that another “favorable factor” that has been helping to nurture growth and hold down inflation lately growing budget surpluses may also be coming to an end.
“Most of us harbor doubts about whether the dynamics of the political process, some of which have been on display in the current budgetary deliberations, will allow the surpluses to continue to grow,” he said.