Greenspan Says Economy Improving but Risks Remain
By KENNETH N. GILPIN - NYT
The Federal Reserve's chairman, Alan Greenspan, offered his most optimistic outlook for the economy today since taking over the central bank in 1986. And he gave no indication that the Fed was at all inclined to begin raising short-term interest rates anytime soon.
Bond prices moved sharply higher and stocks rose modestly after Mr. Greenspan began his appearance on Capitol Hill this morning.
In his semiannual report to Congress on monetary policy, Mr. Greenspan said "the prospects are good" for a "sustained expansion" of the economy.
At the same time, productivity gains and what the Fed chairman characterized as a "significant level" of underutilized capacity should help keep inflation low.
Mr. Greenspan delivered his remarks and the Fed's forecast to members of the House Committee on Financial Services. On Thursday, he will go to the other side of Capitol Hill and appear before the Senate Banking Committee.
Mr. Greenspan noted that unforeseen circumstances could alter the Fed's outlook and said the central bank was prepared to change its policy stance if the unforeseen arose.
Specifically, the chairman mentioned that "chronic concern" about a sharp spike in oil or natural gas prices as well as the potential deleterious effects of ballooning federal budget deficit.
But analysts said that for the most part his prepared remarks contained no surprises.
"He lays out a case for the economy that seems consistent with the facts now," said David Resler, chief economist at Nomura Securities International. "Those who were looking for an immediate change in monetary policy are disappointed. There is nothing in his testimony that says a policy move is imminent. Nor should there be."
Last month, Fed policymakers sent a brief chill through financial markets when they backed off a previous pledge to keep short-term interest rates low for a "considerable" period and instead, substituted language suggesting they intended to be patient.
Mr. Greenspan embraced that thought again today.
"With inflation very low and substantial slack in the economy, the Federal Reserve can be patient in removing its current policy accommodation," he said.
The bond market, which was nervously awaiting Mr. Greenspan's testimony, rallied as he made his remarks.
"This is a relief trade, not a news trade," said Louis Crandall, chief economist at R.H. Wrightson & Associates in New York. "There had been a fear that Greenspan was going to surprise the market."
The stock market, which was full of talk today about the proposed hostile takeover of Walt Disney by the Comcast Corporation, also reacted positively to Mr. Greenspan's comments, with major market indexes slightly higher in midafternoon trading.
But foreign-exchange traders pushed the value of the dollar lower against the Euro and other key currencies after Mr. Greenspan said it would take some time for a cheaper dollar to have a positive impact on America's huge current account deficit.
In a report that accompanied Mr. Greenspan's prepared remarks, the Fed forecast that on an inflation-adjusted basis, the economy could expand this year at a rate of 4.5 percent to 5 percent. Meanwhile, as measured by the personal consumption expenditure price index — the inflation measure the Fed prefers — prices will rise at a rate of 1 percent to 1.25 percent in 2004. In its last forecast, which was made in July 2003, the Fed said it expected inflation to rise between 1 percent and 1.5 percent in 2004.
Despite the strong growth, the Fed projects that the unemployment rate, currently at 5.6 percent, will probably fall only to 5.25 percent to 5.5 percent this year.
During the question-and-answer period, Mr. Greenspan was pressed by House Democrats on the politically charged issue of job growth.
Congressman Paul Kanjorski, a Pennsylvania Democrat, asked the Fed chairman if the recent projection by the Bush administration that the economy would generate 2.6 million new jobs over the course of 2004 was a realistic forecast.
"Is the administration's forecast, the current one, feasible?" Mr. Greenspan said in framing the congressman's question. "If productivity growth slows down to a more historic level, it's probably feasible. But we have not as yet seen any evidence that that is the case. In other words, we're still seeing very little evidence of new job hiring."
In response to a question from a member of the House committee, Mr. Greenspan said the "natural" unemployment rate should be around 4 percent.
Even as he offered his optimistic assessment, Mr. Greenspan cautioned Congress about the perils of the Federal budget deficit, and urged it to resist efforts to restrict free trade.
"The imbalance in the federal budgetary situation, unless addressed soon, will pose serious longer-term fiscal imbalances," he said. "The longer we wait before addressing these imbalances, the more wrenching the fiscal adjustment ultimately will be."
For now, though, the Fed will maintain a status quo policy, Mr. Crandall said. "Economic performance has got to be extremely favorable for them to consider a rate hike this year," he said.
Growth of 5 percent or better and monthly employment gains of 200,000 or more might get the central bank to alter its current monetary policy stance, Mr. Crandall said.
"At the beginning of the year, I thought the Fed would tighten in August," he said. "Now I think it will happen in September. But if we have another month or two of sluggish job growth, I don't think they will do anything to change current policy this year."
Copyright 2004 The New York Times Company |
