Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: THURSDAY, July 21, 1994 TAG: 9407250025
SECTION: BUSINESS PAGE: A-6 EDITION: METRO
SOURCE: By LON WAGNER STAFF WRITER
DATELINE: LENGTH: Medium
In his twice-a-year report to Congress on monetary policy, Greenspan warned the Senate Banking Committee of increasing signs of future inflation and said he could not let that pressure get out of hand.
First Union economist David Orr said the Fed chairman's remarks were full of "Greenspan-speak." Orr agreed with Greenspan that the economy is showing signs of inflation, and said he would have liked Greenspan to take a stronger position.
Orr thinks the real inflation threat will rear its head next week when the second-quarter gross domestic product figure is made public. Orr predicts economic growth will top 4 percent.
"I think it's very clear from my monitoring of economic data that we need to [raise rates] and I wish he would have just said it," said Orr, in Charlotte, N.C. "He was not as straightforward as I think he should have been."
People who follow the economy found themselves scratching their heads and wondering what Greenspan meant with statements such as: "It is an open question whether our actions to date have been sufficient to head off inflationary pressures."
"Oh, boy," said Roy Pearson, director of the Bureau of Business Research at the College of William and Mary in Williamsburg when he heard Greenspan's comments.
Pearson said concerns about inflation have become more widespread as the unemployment rate has continued to drop and factories have used up more of their manufacturing capacity.
That means manufacturers might not be able to produce enough goods, even though more people want to buy those goods. If "bottlenecks" in production develop, Pearson said, manufacturers will bid more for supplies, the cost of finished products will increase, and inflation will jump.
Crestar Bank economist Chris Chmura said the country's plants are producing at 83 percent capacity, just 1 or 2 percentage points below the level at which inflation traditionally picks up.
She gave an example of how that happens. The automobile industry is at 90 percent capacity, with a high demand for sport-utility vehicles. So manufacturers have been raising the prices of those cars.
"The producers are able to increase prices," she said, "because people still want them."
Even so, Chmura, in Richmond, doesn't think the Fed will raise short-term rates anytime soon. She said much of the recent economic growth has been in interest-rate sensitive areas - car and home sales - and that is beginning to slow.
"It did seem like he was tightrope walking," she said of Greenspan's comments, "but economic conditions change and he really can't give a solid answer. In the months ahead, if the economy slows further, he won't need to tighten the rates."
Richard Sorensen, dean of Virginia Tech's Pamplin College of Business, said he sees a little national pride and a lot of politics in Greenspan's statements.
On the first front, raising the rates would boost the dollar, which has been at historic lows compared to the Japanese yen. Sorensen said some people "look at that as an important image - 'We're weaker because the dollar is worth less.' "
"The other thing is we have had such significant inflation under previous Democratic administrations that they're overly sensitive," Sorensen said. "They're overreacting."
by CNB