To keep the booming economy from overheating, Federal Reserve chairman Alan Greenspan, speaking at a conference about the "New Economy" hosted by Boston College, repeated his claim that the Fed has no choice but to raise short-term interest rates within the coming months.
Greenspan's comments certainly did not help the stock market today. The Dow Jones Industrial Average sank 196.70 to close at 10,170.50. The Nasdaq, which climbed early in the day to within 20 points of 5,000, reversed course and ended down 10.05 to close at 4,904.74.
Last month, major stock indexes took a beating after Greenspan cautioned that interest rates would rise more than expected to cool the economy. Greenspan said that the central bank, which has increased rates by a quarter-point four times since last June, will hike them again to keep inflation in check.
Also speaking at the finance conference, Securities and Exchange Commission chairman Arthur Levitt reiterated his plea for investor caution. Levitt said he is worried that investors are placing heavy bets on technology start-ups with soaring stock prices but unproven business plans.
"Many new companies rushing to market today will not be around for the long haul, perhaps not even a few years from now," Levitt said. "Investors today cannot fall prey to an urge that tells them it's OK to suspend good judgment and invest with their eyes closed and their fingers crossed."
Levitt, speaking in front of 1,800 technology executives, venture capitalists and students, urged that while investors are facing a robust economy, they need to pay closer attention to their investments, to conduct deeper research on the companies they are investing in, and most importantly, to understand and manage risks.
"There is still much we don't know about what drives today's economy and even less about where it's heading," Levitt said. "And, more than ever, investors must remain focused on what makes sound investing sense for their families, for themselves, and for a more financially stable future."
Greenspan echoed Levitt's concerns and said the economy is expanding too quickly, forcing inevitable hikes in interest rates to keep inflation under control.
"Our immediate goal at the Federal Reserve should be to encourage the economic and financial conditions that will best foster the technological innovation and investment that spur structural productivity growth," Greenspan said. "Achievement of this goal requires a stable macroeconomic environment of sustained growth and continued low inflation."