Greenspan Warns, ``U.S. Customer Prices Needs To Be Watched``

Federal Reserve Chairman Alan Greenspan on Wednesday indicated that there would be more interests rate cuts by saying that rising wage and energy costs are not bubbling up into consumer prices. Since the index of leading economic indicators (ILEI), which forecasts the economy 3-6 month ahead, has risen with the widest range since one and a half year, the recovery of the U.S. economy is highly expected. A private research institute Conference Board announced that the U.S.’ ILEI has increased by 0.1 percent in April and by 0.5 percent last month, which was the biggest increase since December 1999. This trend indicates that the five-time interest rate cuts this year and the tax reduction measure will have effects on the U.S. economy by the end of this year.

Greenspan told the Senate Banking Committee, ``despite the deterioration of economy, rising wage and energy costs are not bubbling up into consumer prices.`` British Financial Times and the U.S. economy analysts have raised a concern that the Board of Governors of the Federal Reserve System (FRB)’s aggressive interest rate cuts could cause inflation. Greenspan also said that ``the consumer prices should be stabilized for the efficient and productive growth of the economy.``

Greenspan did not mention on the direction of the future interest rate policy at the meeting held a few days prior to the Federal Open Market Committee (FOMC) on 26-27 in which the interest rate cuts will be discussed. Greenspan said that although it was expected that the increasing number of layoffs would have negative influence on consumer’s sentiment and behavior, there was no sign that the consumer expenditure was worsening. In relation to this, Business Week (25th) analyzed the current trend saying that ``despite the worsening of companies’ profitability and the stagnation of the stock market, consumer’s sentiment has not been aggravated, and this underpins the U.S. economy.`` As proofs, Business Week suggested; since the saving rate is increasing, consumers have enough money to consume; although consumers’ wealth has been reduced due to the stagnation of the stock market, rising rate of wage surpasses the inflation rate; as the prices of housing has been increasing, it counterbalances the reduction of wealth through the fall of the stock prices. The U.S. economy analysts expect that the U.S. economy will recover as the consumer’s sentiment revives followed by the refund of the taxes commencing next month.

Shin Chi-Young higgledy@donga.com