How Alan Greenspan's Warning Got Overheeded

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This time, it seems, he was warning us about irrational panic. "Greenspan knew about the Producer Price Index numbers ahead of time," says TIME senior economics reporter Bernard Baumohl, referring to the big scary inflation number that — along with Alan Greenspan’s own Thursday night speech about an "asset bubble" — threw the markets into an early-morning tailspin Friday. "He warned about wild fluctuations because he knew how the market would react to the bad news about producer prices, and his role is to warn investors that an adjustment in stock prices could come quickly."

It came quickly indeed. Investors spotted the doubling of the PPI on Friday morning and sold stocks like so many hot potatoes. The Dow shed over 200 points in oh, the first 15 minutesof trading after the bell, with the NASDAQ following suit. But an hour later, the sell-off had screeched to a halt. Despite Greenspan's hint, says Baumohl, investors had overreacted again. "That producer-price number is probably more of a spike than a trend. Oil prices have probably peaked, and gains in productivity will probably help companies absorb this increase rather than passing it on to consumers. Don’t expect a similar increase in the Consumer Price Index when it comes out next week."

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That didn’t stop the bond market, which has been smelling inflation all week, from running the yield on Treasury's benchmark 30-year issue to a new two-year high of 6.36 percent at one point. (When no one wants a bond because expected inflation would eat into its long-term value, its yield –- the payoff for putting your money in it –- goes up in response; 6.36 is about equivalent to abject begging.) But even that spike was showing signs of flattening as a correction of the correction set in. None of this changes the long-term outlook; Greenspan is still genuinely worried about an "asset bubble" (although he’ll never tell how many points make a bubble), and the markets are still headed for a tepid autumn overall as Y2K uncertainties loom larger and larger. But the Fed chairman also knows how this market loves to panic about numbers, and he wants everybody to just calm down. By late afternoon the Street had ignored him all over again, and a deadened Dow had finished its worst week in recent memory by briefly dipping below 10,000 before settling in at 10,019. At this rate, the CPI had better be sparkling.