New York, NY, October 18--High oil prices have dampened economic growth and a further increase would risk "more serious negative consequences," Federal Reserve chairman Alan Greenspan said Friday.
High oil prices have already trimmed about three quarters of a percentage point off economic growth this year, Mr. Greenspan said in a speech to the National Italian American Foundation in Washington. That is a far smaller effect than when oil shot up in the 1970s, he said. But the "risk of more serious negative consequences would intensify if oil prices were to move materially higher."
Mr. Greenspan spoke on the same day new data showed consumers' spending holding up remarkably well as the third quarter ended, but their moods becoming more pessimistic because of rising energy prices.
Mr. Greenspan ratified those concerns. He noted that, as oil prices rose through the summer, gasoline prices actually fell as refiners' profit margins shrank from unsustainably wide levels. Margins are "back to normal," he said, so gasoline and home heating prices would mirror changes in oil.
High oil prices have always posed a dilemma for the Fed, since they both raise inflation in the short run, which would normally call for higher interest rates, but also slow spending and investment, which would normally call for lower interest rates. Recent remarks by Fed officials suggest they see more of a risk to economic growth than inflation.
Fed policy makers are expected to raise their short-term interest rate target to 2% from 1.75% when they meet Nov. 10. But investors think the central bank will then pause in its campaign to raise rates, in part because of the uncertainty high oil prices have cast on the economic outlook.
Mr. Greenspan said most of the recent jump in oil prices reflects supply disruptions due to Hurricane Ivan in the Gulf of Mexico. He noted prices on contracts for delivery in six years have not changed much, so "part of the recent rise in spot prices is expected to wash out over the longer run."
Mr. Greenspan, who started tracking the oil industry long before he joined the Fed in 1987, expressed greater optimism than many analysts on the long-run supply outlook. New technology that boosts the amount of oil that can be economically recovered from known deposits "is likely to ensure the needed supplies, at least for a very long while."
On Friday, the Commerce Department said retail sales rose 1.5% in September from August, led by a 4.2% jump in auto-related sales. Even excluding the volatile vehicle category, sales were up a robust 0.6%, the largest advance since May.
But with gasoline prices up 6% from September's average and higher heating oil and natural-gas prices about to hit households, the outlook for consumer spending is cloudy.
