Federal Reserve Chairman Alan Greenspan issued a fresh warning yesterday that investors shouldn't be lulled into a false sense of security...
WASHINGTON — Federal Reserve Chairman Alan Greenspan issued a fresh warning yesterday that investors shouldn’t be lulled into a false sense of security by the economy’s long stretch of low interest rates.
“History cautions that extended periods of low concern about credit risk have invariably been followed by reversal, with an attendant fall in the prices of risky assets,” Greenspan said in a speech delivered via satellite to a meeting of the National Association for Business Economics in Chicago.
The Fed chief repeated worries he has expressed in the past on the same day that two national reports showed sharply lower numbers, the first economic data that take into account Hurricane Katrina hitting the Gulf Coast.
The Commerce Department said new-home sales plunged 9.9 percent in August, the largest amount in nine months.
Most Read Stories
- Billionaire Paul Allen pledges $30M toward permanent housing for Seattle’s homeless
- Seattle just broke a 122-year-old record for rain — because of course it did
- Is Seattle a target for a North Korean nuclear attack? Well, not quite yet, insiders say
- Seahawks' Marshawn Lynch agrees to contract with Raiders, is traded to Oakland in exchange of 2018 draft picks
- Boeing’s budget ax falls on popular gym for employees
And, the Conference Board said its survey of consumer attitudes dropped 19 points this month, the largest drop in 15 years as Americans grew anxious about the rising costs of heating their homes and filling their gas tanks. The decline raised questions about consumer spending for the rest of this year, including the holiday shopping season.
Greenspan didn’t specify what risky assets he was referring to, but the Fed chief has been sounding an alarm for months — including an emphatic warning Monday — about the perils to homeowners and lenders using risky and exotic types of mortgages that may spell trouble for some investors counting on rates to stay low for a long time.
“Such developments apparently reflect not only market dynamics but also the all-too-evident alternating and infectious bouts of human euphoria and distress and the instability they engender,” he said.
“This speech is telling traders that the stability they’ve come so well to know is their own worst enemy,” said Diane Swonk, chief economist at Mesirow Financial in Chicago. The Fed’s view, she said, is “the bond market has not priced in enough risk.”
Greenspan, 79, also may be trying to ensure the economy is in order when his 18-year career at the Fed ends, economists said. His term as chairman expires Jan. 31.
“He’s thinking about legacy-building at this point, and the one thing he doesn’t want to do is leave at the top of an immense bubble and have it burst soon after he leaves,” said Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Conn. “He kind of touched on it [Monday] in relation to the housing market.”
The country enjoyed some of the lowest mortgage rates in more than four decades, when the Federal Reserve ratcheted down a key interest rate it controlled to the lowest level in 46 years. Since June 2004, however, the Fed has been raising rates gradually to keep inflation in check.
This pattern is beginning to have an impact on long-term interest rates set by financial markets. While mortgage and other long-term rates are still considered low, analysts believe they will move higher in coming months.
The economy, he said, has shown incredible resilience in the face of major shocks, including the bursting of the stock-market bubble in 2000 that wiped out trillions of dollars in paper wealth and the Sept. 11 attacks.
Even now, coping with steep rises in oil and natural-gas prices over the past two years, the economy thus far has weathered the situation “reasonably well,” Greenspan said.
Yesterday, the independent economic-research panel the Conference Board said its consumer-confidence index, compiled from a survey of U.S. households, dropped 18.9 points to 86.6 from a revised reading of 105.5 in August. Analysts had expected the September reading to be 98.
That was the biggest one-month decline since October 1990, when the index lost 23 points as a recession gripped the economy.
Studies have found that small moves in the index are not a particularly reliable reflection of consumer behavior, said economist Ray Stone of Stone & McCarthy Research Associates.
But when it makes big moves, he said yesterday, it tends to be much more accurate, “and this was a big move.”
“I would expect there will be some coincident change in consumer behavior,” Stone said.
Economists closely track consumer confidence, because consumer spending accounts for two-thirds of all U.S. economic activity.
The drop in consumer confidence, which followed an unexpected gain in August, also raised concerns about shoppers’ ability to spend in the critical fall and holiday seasons.
Also yesterday, the Commerce Department said new-home sales fell 9.9 percent last month to a seasonally adjusted annual rate of 1.24 million units.
Even with the slowdown, the median sales price rose 2.5 percent from July’s level to $220,300.
The bigger-than-projected sales drop could signal that the nation’s red-hot housing market is starting to slow down, but reports so far are mixed.
“Today’s numbers show that consumers are not very optimistic about the economy. As a result, we will see consumer spending reduced until we see some relief on energy prices,” said Gary Thayer, chief economist at A.G. Edwards & Sons.
“If we don’t get some relief, it looks like it will be a very weak holiday season,” he said.
Thayer wasn’t as concerned about the home-sales report, saying the sector was due for a “cooling off.” He doesn’t think the housing market is headed for a bust.
Consumer-confidence information provided by Knight Ridder Newspapers. New-home sales information provided by Associated Press reporter Anne D’Innocenzio. Comments on Greenspan by economists Swonk and Stanley provided by Bloomberg News.