Greenspan: 'Fedspeak' Keeps World on Toes
By Barbara Hagenbaugh
WASHINGTON (Reuters) - Federal Reserve Chairman Alan Greenspan said on Friday he
wanted to keep the world guessing on the timing of U.S. interest rate moves, leaving investors
hungry for clues as to the Fed's next decision.
The powerful Fed chief dashed hopes of a quick rate cut two days ago when he said the Fed preferred to move at its scheduled meetings -- a comment already-dejected investors took as a signal that the central bank would not change rates before its nextmeeting on March 20.
But Greenspan said on Friday that he had intended to keep the waters murky.
``I hope I was sufficiently ambiguous not to have indicated timing of when or if we would we move,'' Greenspan told members of the House of Representatives Budget Committee after testifying on tax cuts. ``I hope I was adept at what we term 'Fedspeak' on that issue.''
For weeks, analysts have been speculating whether the Fed will cut rates between regular meetings, as it did in January in response to an influx of reports painting a picture of a quickly deteriorating economy.
The Fed took markets by surprise when it lowered rates on Jan. 3 by a half-percentage point, a move followed by another half-point cut at its scheduled meeting in late January.
Most analysts believe yet another half-point rate cut is in the cards when the Fed meets on March 20, which would bring the key federal funds rate to 5 percent.
Greenspan -- who has said U.S. economic growth has just about stalled -- did not offer any comments on Friday to sway investors from thinking the Fed will act aggressively, noting that inflation was ``very well-contained'' and calling recent reports of rising prices a ``blip'' not supported by other data.
A significant inflation threat could keep the Fed from cutting interest rates. Financial markets largely shrugged off Greenspan's latest comments in mixed trading.
NOT TOO SLOW
Greenspan rebuffed criticism that the Fed had responded too slowly to signs that the economy was abruptly downshifting, saying a premature move could have led to a deeper economic malaise.
``Had we moved too soon we would have altered the path of adjustment and conceivably created a higher level of economic activity than we are currently seeing, inducing far greater imbalances and a far greater correction of adjustment than we are seeing at the moment,'' he said.
In testimony that focused on fiscal policy, Greenspan repeated his support for tax cuts but warned lawmakers against abandoning fiscal discipline, which could tip the country back into deficits.
His testimony largely mirrored remarks he delivered to a Senate panel in late January that had ruffled political feathers. That testimony irked Democrats who viewed it as an abrupt about-face from Greenspan's prior stance that debt reduction should be the key fiscal policy goal -- a shift they saw weakening their arguments against President George W. Bush's $1.6 trillion tax cut proposal.
Greenspan called the potential for completely paying off the federal debt ``a major achievement,'' warning however that the chances of a return to budget deficits as a result of poor fiscal policy were not ``not negligible.''
But despite economic weakness, government receipts should be well-maintained in the near-term, he said. He then reiterated that it is better to devote surplus dollars to tax cuts rather than a congressional spending spree.
``It is far better, in my judgement, that the surpluses be lowered by tax reductions than by spending increases,'
' the Fed chairman said. He also indicated that he felt there was some urgency to make a decision about this with budget surpluses piling up.
``Without policy changes, private asset accumulation is likely to begin in just a few short years,'' he said, warning that such an accumulation by government could distort financial markets.
COSTLY DISTORTION
Greenspan's testimony came as Bush tours the nation to sell his $1.6 trillion tax cut proposal.
Although the powerful Fed chief has not backed a specific tax package, his comments in late January irritated Democratic lawmakers who had used Greenspan's previous words about the importance of paying down the debt to back their arguments that large tax cuts could harm the world's largest economy.
Greenspan, however, argued that his comments were not a reversal in opinion, but were instead based on projections of ever-increasing budget surpluses, and the potential to pay off the government's debt earlier than had been expected before.
The potential for an early debt payoff, he said, created the likelihood the government would begin accumulating private assets, which could create ``costly'' market distortions.
Greenspan, straying into political waters, warned that it was possible the projected surpluses might not materialize and said the use of a ``trigger'' -- a mechanism to specify a point at which tax cuts would be reeled in if the forecasts proved too optimistic -- may be a good idea.
Democrats on Capitol Hill have discussed adding such a trigger mechanism to any tax cuts package, but Bush on Friday expressed skepticism about the idea.
Treasury Secretary Paul O'Neill on Thursday said a trigger mechanism would make it hard for consumers to have confidence tax cuts were coming and thus the reductions would not provide the desired economic stimulus. |
