WASHINGTON (AP) -- Federal Reserve Chairman Alan Greenspan said today that the nation's central bank must pay closer attention than ever before to what happens on Wall Street because more Americans are investing in stocks.

"As the value of assets and liabilities have risen relative to income, we have been confronted with the potential for our economies to
exhibit larger and perhaps more abrupt responses to changes in factors affecting the balance sheets of households and businesses,'' Greenspan said.

His remarks were in a speech to be delivered today at the Fed's annual retreat, in Wyoming's Grand Tetons. The text was distributed in Washington.

There has been a debate in economic circles over whether financial
markets should be taken into consideration when the Fed sets interest rate policy. Since the central bank's primary response is to
keep inflation in check, some argue, it needs to focus on price changes in the real economy, looking at such things as whether commodity prices or wages are rising too quickly.

Greenspan, however, in today's speech, said that given the larger
percentage of household wealth that is now accounted for by investments, the central bank needs to watch more closely what
happens on Wall Street.

"Central bankers, in particular, are going to have to be able to
ascertain how changes in the balance sheets of economic actors influence real economic activity and, hence, affect appropriate economic policies,'' Greenspan said.

Greenspan has expressed concern about the high-flying stock market before. In December 1996 he caused a sharp, brief selloff in markets around the world by wondering aloud whether investors were in the grip of "irrational exuberance.''

At the time of that speech, the Dow Jones industrial average was
hovering around 6,500. Monday's record of 11,299.76 put the Dow 74 percent above that mark. On Thursday the Dow fell 127.59 points to close at 11,198.45.

Greenspan returned to that theme in a more technical way today,
discussing what he called "waves of optimism and pessimism'' that are currently affecting stock prices.

He made a number of observations about various factors that make it
difficult for investors to judge the true value of any given stock in today's economy. He said one problem was the "rapid shift in
the composition of gross domestic product toward idea-based''
technology, including such things as computer software.

Other factors he cited as giving investors problems in determining stock values included how a company accounts for its expenses on its balance sheet. Greenspan said a recent internal Fed study found that undervaluing the cost of stock options granted to employees resulted in overstatement of profits by one to two percentage points over the last five years.

Greenspan said another difficulty that economic forecasters face in
judging how much weight to give to the stock market is the uncertainty of knowing how investors will react to unforeseen and unusual events.

On this point, he cited the turbulence created a year ago in financial
markets around the world when Russia unexpectedly defaulted on billions of dollars in foreign debt.

"That episode of investor fright has largely dissipated,'' Greenspan
said. "But left unanswered is the question of why such episodes erupt in the first place.''

Despite all the sophisticated economic models that forecasters now have at their disposal, he said, it still is virtually impossible to predict when a financial market becomes over-valued and a stock-market crash is imminent.

"To anticipate a bubble about to burst requires the forecast of a
plunge in the prices of assets previously set by the judgments of millions of investors, many of whom are highly knowledgeable,''
he said.

But even with this difficulty, Greenspan said, central bankers still
must invest more efforts in determining the links between stock -market values and the real economy. He specifically said that
further study is needed on something economists call the "wealth
effect,'' the link between rising investment holdings and consumer spending.

"We no longer have the luxury to look primarily to the flow of goods
and services, as conventionally estimated, when evaluating the macroeconomic environment in which monetary policy must
function,'' Greenspan said.