Greenspan: U.S. Still Growing

Despite all the troubles around the world and in the stock market, the U.S. economy is still growing, Federal Reserve Chairman Alan Greenspan said Wednesday.

Greenspan spoke to the annual meeting of the National Association of Business Economists, giving a detailed account of how he sees the current global crisis affecting the U.S. economy.

While Greenspan spoke, the bond market rallied. The 30-year bond had been down nearly 1 1/2 points, but recovered almost all of those losses.

The Fed chief, who led the move to lower U.S. interest rates last week, said the global economic situation is unusual and demands close watching, but discounted reports that the U.S. economy is about to collapse. "We're in good shape," he said.

But he acknowledged that global forces and the bear market would "dampen demand to an unknown extent." He said net wealth had fallen by $1.5 trillion in the United States due to the collapse of stock prices. The negative wealth effect would surely reduce consumer consumption and home construction.

"It's pretty obvious, I think, that the outlook for 1999 for the U.S. economy has weakened measurably," he said.

"This is the time for monetary policy to be especially alert," he said.

Much of his remarks detailed the shift in investor psychology that the world has seen over the past year. He said much of the flight to quality that has boosted U.S. treasuries at the expense of almost every other investment was due not only to mounting risk-aversion, but also to the demand by investors for an "illiquidity premium."

Simply put, investors are flocking to bonds because they know they can always sell them. The downside is that other investments - from high-grade corporate debt and junk-bonds to equities - are shunned.

Greenspan said shifts in risk aversion can be seen in the U.S. economy, where banks are demanding higher collateral. He cited a Federal Reserve study published last week that showed bigger companies were facing tougher scrutiny from bankers.

"We are far from a credit crunch," in the United States, he said.

Written By Rex Nutting, Washington bureau chief for CBS MarketWatch