Fed chairman not worried about rising energy prices wreaking havoc with economy

Fed chairman not worried about rising energy prices wreaking havoc with economy

WASHINGTON - Oct 15 (The Associated Press)

This year's surge in energy prices is likely to have far less of an impact on the economy than the oil shocks of the 1970s, Federal Reserve Chairman Alan Greenspan said Friday.

Greenspan predicted that the global economy will adjust to the recent surge in prices, which has seen oil topping $50 per barrel, by boosting energy exploration and production and by increasing fuel efficiency. But he conceded that the transition period could feature unexpected bumps.

"We and the rest of the world doubtless will have to live with the uncertainties of the oil markets for some time to come," Greenspan said in remarks to the National Italian American Foundation in Washington.

Oil prices closed at a record of $54.76 per barrel on Thursday as fears about supplies in the United States and the possibility of attacks on oil pipelines in the Middle East have sent the price of crude to record levels in dollar terms.

Greenspan, however, noted that even with the recent jump, energy prices are still only three-fifths as high, after adjusting for inflation, as they were at their all-time peak in February 1981.

He said this means that the overall impact on the economy should be lower this time around than during that period, when the oil shocks of the 1970s and early 1980s were enough to push the country into a series of recessions.

Greenspan said that so far this year, the rise in energy has probably trimmed the gross domestic product by about 0.75 percentage point, far less than the shocks of two decades ago.

However, Greenspan warned, "Obviously, the risk of more serious negative consequences would intensify if oil prices were to move materially higher."

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

Greenspan in his comments Friday made no reference to the Fed's current drive to raise interest rates to make sure that a rebounding economy does not generate unwanted inflationary pressures.

The central bank has boosted its key policy instrument, the federal funds rate, from a 46-year low of 1 percent to 1.75 percent currently, making quarter-point moves at its meetings in June, August and September.

Analysts believe the Fed will keep raising rates at a moderate pace for the rest of this year.

Greenspan, a conservative economist who sets great store in the power of free markets to govern the economy, said he believed that market forces would act as they did in the 1970s to buffer the economy from the shocks of rising prices.

"Although OPEC production quotas have been a significant factor in price determination for a third of a century, the story since 1973 has been as much about the power of markets as it has been about power over markets," Greenspan said. "The signals provided by market prices have eventually resolved even the most seemingly insurmountable difficulties of inadequate domestic supply in the United States."

Greenspan did not make any comments on current economic conditions although he said last month that he believed the economy had "regained some traction" after a slowdown in activity in late spring that he blamed on this year's sharp spike in energy costs.

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