Ron Frehm/AP Federal Reserve Chairman Alan Greenspan worries about 'wealth effect'

Private economists viewed Greenspan's comments as a further indication that the Fed will boost interest rates at its next meeting on Feb. 1-2.

But Wall Street investors pushed stock prices higher Friday, with the most closely watched indexes all in record territory. The Dow Jones industrial average was up 131 points at 11,713 with the technology-heavy Nasdaq composite index and the broader Standard & Poor's 500 index also showing big gains.

The Clinton administration's chief economic spokesman, Treasury Secretary Lawrence Summers, refused to comment directly Friday on Greenspan's worries that the high-flying stock market, by boosting consumer spending, could threaten inflation pressures down the road.

Calling Greenspan's comments a "thoughtful speech," Summers said the administration continues to believe the best approach to managing the economy is ensuring that the government's policies support good economic fundamentals.

Summers, who will be in Tokyo on Jan. 21 with Greenspan for a meeting of finance officials from the world's seven largest economies, said it is important for America's allies to push forward with efforts to strengthen global growth and help alleviate America's soaring trade deficit.

In Greenspan's remarks to the Economic Club of New York Thursday night, he noted that many economists estimate that fully one-fourth of annual economic growth since 1996 — about 1 percentage point of the 4 percent growth rate — has come from the "wealth effect" of consumers spending more because of their rising investment portfolios.

Greenspan said this added consumer demand is taxing the economy's resources and if not moderated could lead to rising inflation because of tight labor markets and stretched production capacity.

"It is this imbalance between growth of supply and growth of demand that contains the potential seeds of rising inflationary and financial pressures that could undermine the current expansion," Greenspan told his audience of top economists and Wall Street professionals.

But at the same time, Greenspan moderated his inflation worries by noting that at present the economy has been able to grow at a strong rate without pushing prices higher.

"Not only is the expansion reaching record length, but it is doing so with far stronger-than-expected economic growth," Greenspan said.

Still, private economists said Greenspan's worries about inflation problems down the road left little doubt in their minds that the central bank will raise rates again in February.

"Greenspan continues to be worried that consumer spending and demand are greater than potential supply," said David Jones, economist at Aubrey G. Lanston & Co., who was in the audience for Greenspan's speech.

Jones said he expected the Fed will follow up its February rate increase with at least one more quarter-point boost in the federal funds rate, the interest that banks charge on overnight loans, probably at the March meeting.

But Jones said Wall Street investors who came to the speech fearing that Greenspan would sound an even more hawkish note on inflation were likely to be relieved that he balanced his inflation worries with extensive praise for how well the economy is doing at present.

Greenspan said while economists 10 years from now undoubtedly will have a clearer picture of the new forces at work in the economy, such as rising productivity, the Fed can't wait that long to make its decisions.

"Regrettably, we at the Federal Reserve do not have the luxury of awaiting a better set of insights," Greenspan said. "Indeed, our goal, in responding to the complexity of current economic forces, is to extend the expansion by containing its imbalances and avoiding the very recession that would complete a business cycle."

During a question and answer session following his speech, Greenspan said the central bank would release before its February meeting a set of guidelines intended to help financial markets better interpret the Fed's new policy of revealing changes in its so-called directive. The directive is intended to signal the future course of interest rates but so far has left markets confused.

Greenspan said that when economists look back from the year 2010 on the current period, they may well conclude "at the turn of the millennium, the American economy was experiencing a once-in-a-century acceleration of innovation which propelled forward productivity, output, corporate profits and stock prices at a pace not seen in generations, if ever."

But Greenspan, who has worried at various times about over-exuberance on Wall Street, suggested that the 2010 review might conclude alternatively that "a good deal of what we are currently experiencing was just one of the many euphoric speculative bubbles that have dotted human history."