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Greenspan Relieves Anxieties On Recent Stock Market Drop

By Robert A. Rosenblatt
Los Angeles Times

Federal Reserve Board Chairman Alan Greenspan said Tuesday that investors shouldn't be shaken by the market-roiling volatility of high-technology stocks, which he said simply reflects the uncertain prospects of companies with "very large potential and also very high risk."

Recent turbulence in the market is normal behavior, Greenspan told the monetary policy subcommittee of the House Banking Committee. It is the steady, uninterrupted gains of recent years that were highly unusual for the market, Greenspan said.

Discussing the stomach-turning gyrations of the technology issues, the Fed chairman said, "We know that a lot of these companies in five years won't exist. They will have blown it, or one can turn into a Microsoft."

The high-tech stocks "will fluctuate tremendously" because of the opportunities for huge profits or total losses, he said. By contrast, the stocks of companies in mature industries are much less volatile because the prospects for profits are in a much more narrow - and predictable - range, he suggested.

The Fed chairman offered an upbeat assessment of the economy, now in its 65th month of expansion without showing any danger signs of generating significant inflationary pressures.

Wages are rising, but prices aren't, Greenspan told the committee. What the Fed cannot determine is whether this means increased productivity, which is good for the economy, or whether it means a coming slump in corporate profits.

"We are approaching some sort of fulcrum - the economy can go in two different ways and it's too early to tell," he said.

This kind of ambivalence will be frustrating for Fed watchers and market analysts trying to anticipate interest rate moves. The stock market has often responded suddenly to a change in the monthly jobless rate or the inflation rate.

The Fed isn't worried by the prospect of full employment, which presumably would trigger wage inflation. The idea is a "fuzzy concept," because the United States has many regional labor markets, Greenspan said. Some locations have a jobless rate of less than 2 percent, while others could have unemployment at 12 percent, he noted.

Owners of fast food restaurants report shortages of entry level workers, and many companies cannot get employees to fill a range of skilled jobs, he said.