Fed Willing to Leave Rates
Low 'As Long as It Takes'
DOW JONES NEWSWIRES
WASHINGTON -- Federal Reserve Chairman Alan Greenspan said Tuesday the central bank will hold its target for short-term interest rates low "as long as it takes" to ensure a solid economic rebound -- and is willing to cut interest rates further if necessary.
Delivering a semiannual report on monetary policy to Congress, Mr. Greenspan said the sluggish economy should gain speed in "coming quarters," propelled by resurgent stock markets and a "heavy dose" of tax cuts and federal-spending increases.
Still, the Fed chairman said policy makers aren't inclined to take any chances. The Federal Open Market Committee "stands ready to maintain a highly accommodative stance of policy for as long as it takes to achieve a return to satisfactory economic performance," Mr. Greenspan said in prepared testimony to the House Financial Services Committee.
He also said that although the Fed's key interest rate now stands at a 45-year low of 1%, "substantial further easings could be implemented" if policy makers decide they are necessary.
Mr. Greenspan's remarks suggested that the Fed isn't likely to contemplate raising interest rates at least until 2005 -- even if the economy accelerates sharply before that.
In a separate report to Congress Tuesday, the Fed said it believes the economy "could grow at a solid pace for some time before generating upward pressure on inflation." That view could cause long-term bond yields, which have risen recently, to decline.
Mr. Greenspan said consumer spending, the mainstay of the economy so far, is likely to accelerate in the near term because of record tax cuts and mortgage refinancings. In the first half of 2003, he said, the net worth of households increased 4.5% because of capital gains from investments and increases in house prices. Homeowners, he said, extracted a record $1.6 trillion in cash-outs from refinancings in 2002.
Moreover, "the recently passed tax legislation will provide a considerable lift to disposable incomes of households in the second half of the year, even after accounting for some state and local offsets," Mr. Greenspan said, referring to tax increases by state and local governments.
But businesses have remained stricken by a "sense of pervasive caution" related in part to the corporate scandals of 2002, Mr. Greenspan said. That has made them reluctant to expand, although industrial production has stabilized.
"As yet there is little evidence that the more accommodative financial environment has materially improved the willingness of top executives to increase capital investment," he said. "Corporate executives and boards of directors are seemingly unclear, in the wake of the recent intense focus on corporate behavior, about how an increase in risk-taking on their part would be viewed by shareholders and regulators."
Greenspan said Fed policy makers, at their last meeting on June 24 and June 25, contemplated what they might do to revive the economy if they no longer had the option of cutting interest rates further. "However, given the now highly stimulative stance of monetary policy and well-anchored inflation expectations, the committee concluded that economic fundamentals are such that situations requiring special policy actions are most unlikely to arise."
"Furthermore, with the target funds rate at 1%, substantial further conventional easings could be implemented if the FOMC judged such policy actions warranted," Mr. Greenspan said. |
