Greenspan Again Says U.S. Economy May Be Expanding Too Fast
By Michael McKee
Greenspan Again Says U.S. Economy May Be Expanding Too Fast
Washington, July 28 (Bloomberg) -- Federal Reserve policy-
makers might raise interest rates again because the U.S. economy
could be growing too quickly, raising the risk inflation is
likely to accelerate, Fed Chairman Alan Greenspan told the Senate
Banking Committee.
Greenspan's warning mirrored his testimony to the House
Banking Committee last Thursday. The text of his remarks was
identical. By law, the Fed chairman must report on the central
bank's view of the economy and monetary policy to both committees
twice a year in February and July.
While Greenspan avoided a specific signal that the Fed's
policy-setting Open Market Committee would raise the overnight
bank loan rate again at its next meeting on Aug. 24, he talked of
another ''preemptive'' attack on inflation. The FOMC raised the
overnight bank rate at its last session June 30.
Greenspan also warned of a possible ''euphoric'' rise in
stocks fueling increased consumer spending. ''If new data suggest
it is likely that the pace of cost and price increases will be
picking up, the Federal Reserve will have to act promptly and
forcefully so as to preclude imbalances from arising that would
only require a more disruptive adjustment later,'' he said.
Over the past week, economic reports have offered a mixed
picture. The Mortgage Bankers Association said today that new
mortgage applications fell 3.2 percent last week. A survey of
consumer confidence released yesterday, however, showed more
Americans plan to buy houses over the next six months.
Durable Goods Orders
The Commerce Department reported today that June orders for
durable goods -- cars, appliances, industrial equipment and the
like -- rose 0.3 percent in June after a 0.8 percent May
increase. June's gain was less than analysts expected. Still,
factory shipments rose 0.9 percent in June after a 1.1 percent
May increase, pulling down the level of unfilled orders and
underscoring the resilience of U.S. economic output.
Responsibility for divining what all that means will fall on
the senators who get to pose questions today. By tradition, the
Fed chairman reads from the same written testimony in his second
so-called Humphrey-Hawkins appearance.
Democrat John Kerry of Massachusetts said he'll ask
Greenspan to discuss the Fed's concerns about labor markets and
stock values, though he doesn't expect to learn a whole lot.
''He may feel he didn't get something over last week, but my
sense is it will be very similar,'' Kerry said.
Employment growth has exceeded the growth of the working-age
population by almost half a percentage point this past year. That
implies that gross domestic product -- the output of all goods
and services in the economy -- ''is growing faster than its
potential'' and a worrisome sign, Greenspan said.
The Fed's official forecast is for a 3.5 percent to 3.75
percent GDP growth rate this year. That's just below the roughly
4 percent expansion the economy sustained during the first six
months of the year and for each of the past two years.
Price Pressures
If unemployment falls any further than the 4.2 percent to
4.3 percent rage of recent months, that would be ''one indication
that inflation risks were rising,'' Greenspan said.
''There can be little doubt that, if the pool of job seekers
shrinks sufficiently, upward pressures on wage costs are
inevitable,'' he said. ''Such cost increases have invariably
presaged rising inflation in that past, and presumably would in
the future, which would threaten the economic expansion.''
So far, ''increasingly evident'' increases in productivity
growth are holding down inflationary pressures, Greenspan said.
After languishing at about 1 percent in the 1970s and 1980s,
productivity growth has been above 2 percent the past three
years. Over the past four quarters it's increased 2.8 percent,
and could reach 3.5 percent if second quarter growth comes in
close to 4 percent, he said.
He warned, however, that productivity must continue to
increase at an ever-faster pace to keep inflation from
accelerating. ''Should the increments of gains in technology that
have fostered productivity slow, any extant pressures in the
labor market should ultimately show through to product prices,''
Greenspan said.
Stock Market Risks
The end of the global economic slowdown also raises
inflation risks, Greenspan said. ''Improving global prospects
also mean that the U.S. economy will no longer be experiencing
declines in basic commodity and import prices that held down
inflation in recent years,'' he said.
And there are signs the economy could slow if stock markets
don't continue ''outsized'' gains, consumer spending could ease,
and business investment fall back, Greenspan said. Still, with
''large unexploited long-term profit opportunities'' available
from low inflation and the growth of technology, ''the typical
cyclical retrenchment could be muted,'' he said.
The Fed's policy-making Open Market Committee boosted the
overnight bank lending rate a quarter-point to 5 percent on June
30. At the same time the central bankers announced they were no
longer predisposed towards another increase anytime soon.
Yet the FOMC statement also noted members were ''especially
alert to the emergence, or potential emergence, of inflationary
forces that could undermine economic growth.''
Greenspan said the FOMC ''did not want to foster the
impression that it was committed in short order to tighten
further.'' Rather, he said, ''it judged that it would need to
evaluate the incoming data for more signs'' that inflation could
be developing.
Last Appearance?
Greenspan's remarks were the second part of the Fed's twice-
yearly outlook report required by the Humphrey-Hawkins Full
Employment and Balanced Growth Act of 1978.
This round of Humphrey-Hawkins hearings could be the last.
The provision of law that requires the Fed's testimony expires
this year. There has been no move yet to enact a new reporting
requirement, although Greenspan has said he thinks it's important
for the Fed to do so and House Banking Committee Chairman Jim
Leach, a Republican from Iowa, said he intends to press for a new
law. |
