Posted on: Saturday, October 16, 2004

Fed chief says U.S. safe from recession

By Martin Crutsinger
Associated Press

WASHINGTON — The world will be living with volatile oil prices for years to come, but this year's price spike should not be serious enough to push the country into a recession, Federal Reserve Chairman Alan Greenspan said yesterday.

Greenspan gave a generally upbeat assessment of the economy's ability to withstand the spike in oil prices of recent months, saying he did not believe the country will see a replay of the oil shocks of the 1970s and early 1980s that led to a series of recessions. But he added some major qualifiers.

"We and the rest of the world doubtless will have to live with the uncertainties of the oil markets for some time to come," he said in a speech to an Italian-American group.

Greenspan also said his forecast of a milder economic impact from the price spike depended on oil prices not rising significantly higher than they have so far. "Obviously, the risk of more serious negative consequences would intensify if oil prices were to move materially higher," he said.

The Fed chairman spoke on a day when crude oil in New York trading hit $54.93, up 17 cents from Thursday's record close. He said that even at current levels, crude oil prices are still about 40 percent below the all-time highs — in inflation-adjusted terms — of February 1981.

Greenspan's comments had a soothing effect on Wall Street, giving an impetus to stocks that had suffered a 153-point drop over the previous two days.

Greenspan predicted that the global economy will adjust to the recent surge in prices by stepping up energy exploration and production and by improving fuel efficiency.

He said this year's increase in oil prices, which stand 80 percent higher than 12 months ago, had the effect of imposing a tax on U.S. consumers equivalent to 0.75 percent of the country's total economic output, or about $80 billion. That was a smaller dampening effect than the oil crises of the 1970s and early 1980s, he said.

But Greenspan said he believed that existing technology and improvements spurred by higher prices should be sufficient to "ensure the needed supplies (of energy) for a very long while."

He made no direct reference to what the central bank might do in response to continued increases in energy prices. But many analysts read his remarks as a signal that the Fed is not yet concerned enough to suspend its campaign to raise interest rates to make sure inflation stays under control.

The Fed has raised its key interest rate from a 46-year low of 1 percent to 1.75 percent in three quarter-point moves in June, August and September. Many analysts look for a fourth increase in rates on Nov. 10.

"Greenspan is saying that the increase in energy prices is a minor, not a major, problem," said David Wyss, chief economist at Standard & Poor's in New York. "But nobody knows for sure because nobody knows what is going to happen in the Middle East."

Wyss said he believes that the oil price increases to date will trim about 1 percentage point from economic growth next year. He is forecasting that the gross domestic product will expand by just 3.5 percent next year, compared with estimates by many analysts of 4 percent-plus GDP growth this year.