rather on a series of potential outcomes and the possible effects of alternative policies, including judgments of the consequences of taking a policy action that might, in the end, have turned out to be less than optimal. i viewed our small increase in the federal funds rate on march 25 as taken not so much as a consequence of a change in the most probable forecast of moderate growth and low inflation for later this year and next, but rather to address the probability that being wrong had materially increased. in the same sense that it would be folly not to endure the small immediate discomfort of a vaccination against the possibility of getting a serious disease, it would have been folly not to take this small prudent step last march to reduce the probabilities that destabilizing inflation would re - emerge. the risk to the economy from inaction came to outweigh the risk from action. to be sure, 1997 is not 1994 when the fed was forced to tighten monetary conditions very substantially to avoid accommodating rising inflation. current financial conditions are much less accommodative than they were in 1994. yet we must be wary. while there is scant evidence of any imminent resurgence of inflation at the moment, there also appears to be little slack in our capacity to produce. should the expected slowing in the growth of demand fail to materialize, we would need to address any emerging pressures in product and credit markets. to understand the problems of capacity restraint, i should like to spend a few moments on what we have learned over the years about economic growth and the conditions necessary to foster it. first it is useful to distinguish between two quite different types of economic growth. one is true, sustainable growth, the other is not. true growth reflects the capacity of the economic system to produce goods and services and is based on the growth in productivity and in the labor force. that growth contrasts with the second type, what i would call transitory growth. an economy producing near capacity can expand faster for a short time through excess credit creation. but this is not growth in any meaningful sense of promoting lasting increases in standards of living for our nation. indeed, it will detract from achieving our long - term goals. temporary fluctuations in output owing to say, inventory adjustments, but not financed through excess credit, will quickly adjust on their own and need not concern us as much, provided policy is appropriately positioned to foster sustainable growth. when excessive credit fostered by the central bank finances excess demand,

mr. greenspan reviews current monetary policy in the united states remarks by the chairman of the us federal reserve system, mr. alan greenspan, at the 1997 haskins partners dinner of the stern school of business, new york university, new york on 8 / 5 / 97. i am pleased to accept this year ’ s charles waldo haskins award and have the opportunity to address this distinguished audience on current monetary policy. a central bank ’ s raising interest rates is rarely popular. but the federal reserve ’ s action on march 25, to tighten the stance of monetary policy, seems to have attracted more than the usual share of attention and criticism. i believe the critics of our action deserve a response. so tonight, i would like to take a few minutes to put this action in the broad context of the fed ’ s mandate to promote the stable financial environment that will encourage economic growth. the federal open market committee raised rates as a form of insurance. it was a small prudent step in the face of the increasing possibility that excessive credit creation, spurred by an overly accommodative monetary policy, might undermine the sustained economic expansion. that expansion has been fostered by the maintenance of low inflation. but the persisting - - indeed increasing - - strength of nominal demand for goods and services suggested to us that monetary policy might not be positioned appropriately to avoid a buildup of inflationary pressures and imbalances that would be incompatible with extending the current expansion into 1998, and hopefully beyond. even if it should appear in retrospect that we could have skirted the dangers of credit excesses without a modest tightening, the effect on the expansion would be small, temporary, and like most insurance, its purchase to protect against possible adverse outcomes would still be eminently sensible. for the federal reserve to remain inactive against a possible buildup of insidious inflationary pressures would be to sanction a threat to the job security and standards of living of too many americans. as i pointed out in testimony before the congress in march, the type of economy that we are now experiencing, with strong growth and tight labor markets, has the special advantage of drawing hundreds of thousands of people onto employment payrolls, where they can acquire permanent work skills. under less favorable conditions they would have remained out of the labor force, or among the long - term unemployed. moreover, the current more - than - six - year expansion has enabled us to accelerate the modernization of our productive facilities. it has long been