Fed chief admits price rise has shaved GDP growth this year, says long-term effects likely limited.
October 15, 2004: 1:01 PM EDT
WASHINGTON (Reuters) - Record oil prices are unlikely to inflict the economic pain they did in the 1970s, Federal Reserve Chairman Alan Greenspan said Friday, adding that he thought the world could adjust to higher-priced oil.
"The impact of the current surge in oil prices, though noticeable, is likely to prove less consequential to economic growth and inflation than in the 1970s,'' Greenspan said in remarks prepared for delivery to a luncheon sponsored by the National Italian American Federation.
Greenspan did say, however, that the rise in oil prices has cut into economic growth this year, though by a smaller amount that during the oil shock of the 70s.
"So far this year, the rise in the value of imported oil -- essentially a tax on U.S. residents -- has amounted to about 3/4 percent of GDP," Greenspan said. Imports subtract from gross domestic product, the broadest measure of the economy, while exports add to it.
"The risk of more serious negative consequences would intensify if oil prices were to move materially higher," he added.
But over the long haul, Greenspan said, technological advances and market forces would likely ensure the world had an adequate supply of oil as it makes an eventual transition to other energy sources.
U.S. oil futures prices closed at a record high $54.76 Thursday but Greenspan noted that on an inflation-adjusted basis, prices remain well below their February 1981 peak.
Oil futures showed little immediate reaction to Greenspan's remarks, with crude for November delivery down 46 cents to $54.30 a barrel.
As prices surged, financial markets have begun to wager more heavily that the U.S. central bank would soon pause in its rate hike campaign, which it began in June to move historically low interest rates to more normal levels.
The Fed has been widely expected to raise overnight borrowing costs a slim quarter-percentage point to 2 percent at its next policy meeting on Nov. 10.
But with economic data mixed and oil prices weighing on consumers, many economists and investors believe the Fed could hold fire at its subsequent gathering in December.
Greenspan's remarks gave a boost to stock prices while Treasury bond prices fell on his remarks.
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