Federal Reserve Chairman Alan Greenspan said Friday that the nation's central bank must pay closer attention than ever to what happens on Wall Street because more Americans are investing in stocks.
"As the value of assets and liabilities have risen relative to income, we have been confronted with the potential for our economies to exhibit larger and perhaps more abrupt responses to changes in factors affecting the balance sheets of households and businesses," Greenspan said.
His remarks were in a speech to be delivered at the Fed's annual retreat, in Wyoming's Grand Tetons. The text was distributed in Washington.
There has been a debate in economic circles over whether financial markets should be taken into consideration when the Fed sets interest-rate policy. Since the central bank's primary response is to keep inflation in check, some argue, it needs to focus on price changes in the real economy, looking at such things as whether commodity prices or wages are rising too quickly.
Greenspan, however, in Friday's speech, said that given the larger percentage of household wealth that is now accounted for by investments, the central bank needs to watch more closely what happens on Wall Street.
"Central bankers, in particular, are going to have to be able to ascertain how changes in the balance sheets of economic actors influence real economic activity and, hence, affect appropriate economic policies," Greenspan said.