Wall Street Journal - March 2, 2000
Greenspan Was Afraid of Market Bubble In '94, and Rate Boost Sought to Prick It
By JACOB M. SCHLESINGER Staff Reporter of THE WALL STREET JOURNAL
WASHINGTON -- Federal Reserve Chairman Alan Greenspan was concerned about a stock market bubble as early as 1994, and at least one interest-rate increase that year was aimed in part at cooling financial markets, Fed documents released Wednesday suggest.
Speaking to fellow Fed officials at the March 1994 policy-making session, Mr. Greenspan said he supported a rate increase the month before partly because he "very consciously and purposely tried to break the bubble and upset the markets in order to break the cocoon of capital-gains speculation." At another point, he said: "When we moved on February 4th, I think our expectation was that we would prick the bubble in equity markets."
Mr. Greenspan's remarks were contained in transcripts of Fed deliberations for 1994, released after the customary minimum lag of five years. A few days before the Fed's February 1994 move, the Dow Jones Industrial Average set what was then a record, reaching just under 4000. That rate increase and subsequent moves helped push the Dow down below 3600 that spring. Wednesday, the industrials closed at 10137.93.
The Fed chairman's comments are notable in that they indicate he was concerned about financial speculation well before he first articulated it publicly in his famous "irrational exuberance" speech of December 1996.
Mr. Greenspan's 1994 remarks also contrast markedly with what he says is the Fed's current stock-market policy. He has declared, most recently in congressional testimony last month, that the central bank isn't attempting to judge whether the stock market's lofty level is appropriate, and isn't out to prick a bubble.
Mr. Greenspan is still clearly worried about the market's high level, and has acknowledged that that is a factor behind the Fed's current rate-increase campaign. But the reason now is different. He says he is worried about the market and its impact on the rest of the economy. Capital gains are creating wealth and fostering what he considers to be an unsustainable consumer spending binge.
While the new Fed documents show the stock market was clearly on Mr. Greenspan's mind six years ago, it wasn't the primary reason he launched the Fed's aggressive rate-raising campaign, which took the fed-funds target from 3% in January 1994 to 5.5% by January 1995.
Then, as now, the Fed was worried that the U.S. economy was growing beyond what experts considered its speed limit -- though at the time the limit was widely believed to be in the range of 2% to 2.5% annual growth in gross domestic product, compared with the commonly accepted 3.5% to 4% today.
"What very readily could end up as the problem [is] if suddenly we find that instead of slipping back to 3% GDP growth or 2.5% or something like that, that the numbers stay up there," Mr. Greenspan said at one point in endorsing the new round of rate rises. "I must also say that the presumption that inflation is quiescent is getting to be a slightly shabby notion," he said, noting some hints -- never realized -- that prices were picking up.
Later that year, Mr. Greenspan suggested that he was still a bit edgy about financial markets, though his concerns had receded. "The stock market, in my judgment, is still a little rich, although off its price/earnings ratios of a while back," he said at the Fed's Nov. 15 meeting. At that time, the Dow was back over 3800.