Greenspan: Fed Watching Oil Prices

WASHINGTON (AP) â€” Federal Reserve Chairman Alan Greenspan said policy-makers will keep watch on surging energy prices to make sure they don't spoil the nation's economic good times. <br><br>On

Thursday, October 19th 2000, 12:00 am

By: News On 6

WASHINGTON (AP) â€” Federal Reserve Chairman Alan Greenspan said policy-makers will keep watch on surging energy prices to make sure they don't spoil the nation's economic good times.

On Wall Street Thursday, stocks were recovering some of Wednesday's losses. By late morning the Dow Jones industrial average had gained 88 points and the Nasdaq index added 172.

While the recent surge in oil prices, which hit a 10-year high of $37.80 in September, has not produced higher overall inflation, Greenspan cautioned that risks remain, especially given the ``political difficulties'' in the Middle East.

``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,'' Greenspan said Thursday in remarks to a monetary policy conference.

``Policy-makers will need to be on the alert for oil-driven, indeed energy-driven, risks to our expansion,'' Greenspan said.

When crude-oil prices spiked last month, President Clinton announced that he would tap the government's emergency petroleum reserve to help offset soaring prices.

November crude futures, which had pulled back nearly 10 percent this week following a surge sparked by Mideast violence, gained 49 cents to $33.48 a barrel in trading on the New York Mercantile Exchange Wednesday.

Greenspan said that in the short run, oil prices are heavily influenced by inventory levels. Those levels have dropped significantly since decisions by the Organization of the Petroleum Exporting Countries in 1998 and 1999 to cut production by more than 3 million barrels a day.

Since that time, OPEC has boosted production to what are now record levels, but Greenspan said hoarding by worried distributors and consumers may be limiting the impact of the increased production.

``In the short run, the price of oil, as that of all commodities, inevitably is influenced importantly by inventory levels, especially when stocks become critically short,'' Greenspan said.

Energy prices shot up 3.8 percent in September, the biggest advance since June. In the first nine months of the year, gasoline prices rose at an annual rate of 22.4 percent and heating-oil costs at an annual rate of 49.4 percent.

But even with these increases, Greenspan noted, ``To date, the spillover from the surge in oil prices has been modest.''

The Federal Reserve has raised interest rates six times since June 1999 to slow the economy and stave off inflation. Greenspan did not directly discuss the future course of interest-rate policy in Thursday's speech.

The Fed on Oct. 3 passed up the chance to raise rates for a seventh time, but cautioned that the increase in energy prices ``poses a risk of raising inflation expectations.''

In a separate speech, Fed board member Laurence Meyer said Thursday that soaring oil prices, while contributing to short-term inflationary pressures, are likely to decline by spring.

``If the expectations in futures prices for oil prove correct, we may soon be treated to an extended period of decline in oil prices,'' Meyer said.

Despite higher energy prices, consumer spending has remained firm, Greenspan said in his remarks. Generally, when consumers have to shell out more for more expensive gasoline, heating oil and other energy products, they have less to spend on other items.

The U.S. economy is in its longest-ever streak of uninterrupted growth, with unemployment at a 30-year low and inflation â€” outside a burst of energy prices â€” largely in check.

Even before last week's escalating violence in the Middle East, oil price pressures had been strong, Greenspan said.

``This largely owed to the possibility of a politically driven removal of a significant part of Iraq's 2.5 million to 3 million barrels a day from global markets at a time when there exists so little available world excess capacity to replace it,'' Greenspan explained.

Greenspan also said that growing federal budget surpluses â€” a reflection of U.S. prosperity â€” has been an important source of national savings, reducing upward pressure on long-term interest rates.

But he wondered whether that would continue.

``I believe 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.''

Greenspan also noted the strong surge in productivity growth, which has helped to keep inflation in check. But as in the past, he cautioned that the strong productivity growth rates experienced in recent years inevitably will slow.

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On the Net: Federal Reserve web site: http://www.federalreserve.gov