Greenspan Says Extra-Low Rates
Must Rise
By JEANNINE AVERSA
Associated Press Writer
March 2, 2004, 5:08 PM EST
WASHINGTON -- Federal Reserve Chairman Alan
Greenspan said Tuesday that extra-low short-term interest
rates eventually will have to go up. He gave no clue when.
Since last June, the Fed's main lever to influence
economic activity, called the federal funds rate, has been
at 1 percent, a 45-year low. Near rock-bottom short-term
interest rates have helped motivate consumers and
businesses to spend and invest, an important factor to lift
economic growth.
"The federal funds rate is accommodative ... but at some
point, it will have to rise to a more neutral state,"
Greenspan said as he fielded questions at an economic
gathering in New York. He didn't discuss the timing of any
such move to raise rates.
Some economists believe the Fed will start to push up rates this year. Others don't
believe higher rates will come until 2005. Most economists expect the rate-setting
Federal Open Market Committee to hold rates steady when it meets next on March 16.
With inflation low and currently not a risk to the economy, Greenspan and his
colleagues, who are responsible for setting interest rate policy in the United States,
have said the Fed can be patient in considering rate increases.
Private economists didn't view Greenspan's remarks on Tuesday as signaling a
change in policy, but they viewed the comments as a needed reminder to Wall Street
and Main Street that superlow short-term rates can't go on indefinitely.
"The chairman is preparing the markets for an eventual rise in the federal funds rate,"
said Lynn Reaser, chief economist at Banc of America Capital Management. "At this
point it remains not a question of whether, but just when, it will be appropriate to raise
the federal funds rate target."
Reaser thinks the Fed might raise rates as early as its meeting on June 29-30.
Greenspan made his comment about short-term rates after delivering a speech to the
Economic Club of New York.
The Fed chief, in his speech, said a weaker dollar eventually should help narrow the
swollen U.S. trade deficit.
The value of the dollar, compared with the currencies of this country's major trading
partners, has declined about 12 percent from its peak in early 2002. A weaker dollar
makes U.S. goods cheaper to foreign buyers and makes foreign-made goods more
expensive to Americans.
"The currency depreciation that we have experienced of late should eventually help to
contain our current account deficit as foreign producers export less to the United
States," Greenspan said. "On the other side of the ledger, the current account should
improve as U.S. firms find the export market more receptive."
America's current account deficit, the broadest measure of trade, hit $550 billion last
year, requiring the United States to borrow that amount from foreigners during a period
when the value of the dollar was falling.
Many private economists worry that if foreigners suddenly should become spooked
and start dumping their U.S. holdings, stock prices could plunge and interest rates
soar.
Greenspan said, however, that as long as a flexible international financial system is
maintained, problems should be avoided. That has allowed the United States and
other countries to weather other economic hard times, the chairman said.
"History suggests that the odds are favorable that current imbalances will be defused
with little disruption to the economy or financial markets," he said.
On China, Greenspan cautioned that if the country were to swiftly move to let its
currency float freely, it could pose a further risk to its fragile banking system and to the
global economy.
The Bush administration has been pressing Beijing to stop linking the yuan to the
dollar and instead let the value of the yuan be set in open markets.
"Many in China, however, fear that an immediate ending of controls could induce
capital outflows large enough to destabilize the nation's improving, but still fragile,
banking system," Greenspan said. "Others believe that decontrol, but at a gradual
pace, could conceivably avoid such an outcome."
The United States' politically sensitive deficit with China in 2003 was almost $124
billion, the biggest ever, as imports from China hit a record high.
America's manufacturers contend that China is deliberately undervaluing its currency
by as much as 40 percent, which gives China a big trade advantage when competing
with U.S. companies.
On Japan, Greenspan said that in time the monetary consequences of the country's
efforts to prevent its currency, the yen, from rising against the dollar "could become
problematic."
"The current performance of the Japanese economy suggests that we are getting
closer to the point where continued intervention at the present scale will no longer
meet the monetary policy needs of Japan," he said.
Copyright © 2004, The Associated Press |
