Greenspan Expected to Say Inflation Still a Threat
Bloomberg:
quote.bloomberg.com
Top Financial News
Thu, 20 Jul 2000, 9:03am EDT
Greenspan Expected to Say Inflation Still a Threat (Update1)
By Noam Neusner
Washington, July 20 (Bloomberg) -- Federal Reserve Chairman Alan Greenspan is expected to say in his twice-yearly report to Congress today the U.S. economy is slowing to a pace closer to that sought by policy-makers, while higher inflation still looms.
That combination will leave the door open to further interest- rate increases this year, in the view of analysts. Greenspan's ``not going to flash the green light'' that they're finished raising rates for now, said Gary Thayer, an economist at A.G. Edwards & Sons in St. Louis.
Greenspan will unveil the Fed's latest economic forecast at a 10 a.m. EDT hearing before the Senate Banking Committee and offer his views on how much the central bank has cooled the economy's growth pace through a series of six rate increases over the past year. Greenspan will acknowledge that ``they've kept the economy from overheating,'' Thayer said, and say they're ``still concerned about inflation.''
Stock index futures and U.S. government securities are little changed ahead of Greenspan's remarks. The U.S. Treasury's 10-year note yield is 6.15 percent, close to a four-week high.
On Feb. 17, the date of Greenspan's most recent report to Congress, the Dow Jones Industrial Average fell 0.4 percent, dragged down by shares of financial companies on expectations that interest rates were headed higher. The yield on the Treasury's 10- year note rose 2 basis points.
A year ago on July 22, the reaction was stronger after Greenspan told Congress the Fed ``will have to act promptly and forcefully'' to raise rates if signs appear that inflation is likely to accelerate. That day the Nasdaq Composite Index fell 2.8 percent and the 10-year note's yield rose 12 basis points.
If Greenspan's closely watched testimony follows the expected path, it also will conform with the most recent statement by Fed policy-makers themselves when they decided last month against raising interest rates for a seventh time in the past year.
The Greenspan-led Fed has boosted the overnight bank lending rate to a nine-year high of 6.5 percent in an effort to push up borrowing costs for consumers and businesses and cool off the economy.
Slowdown Evident
Growth probably slowed to a 3.5 percent annual rate in the just-concluded second quarter and probably will average less than a 3.8 percent pace for the balance of the year, according to the latest survey of economists from Bloomberg News. In the last half of 1999 and the first quarter of this year, the economy grew at an average 6.2 percent rate.
The slowdown is evident in manufacturing and housing. The National Association of Purchasing Management's monthly factory index has fallen for four straight months. And June's starts of new housing construction, to be reported tomorrow, are expected to show a second straight decline.
Inflation at the consumer level, outside of gasoline and other energy costs, rose in June at the same pace as in five of the last six months, suggesting inflation isn't accelerating. Even so, total consumer prices increased 3.7 percent over the past 12 months, and higher energy costs cost at some point start to feed into other prices, many analysts said.
Unemployment, Inflation
Still, unemployment was just 4 percent last month, just above the 30-year low of 3.9 percent reached in April. Greenspan and other Fed officials have repeatedly warned that the U.S. will eventually run out of workers and that will cause companies to bid up wages and pay for them with price increases.
A survey this month by Duke University and Financial Executives Institute showed that 73 percent of chief financial officers expect to raise prices this year by an average of 3.5 percent compared with 2.2 percent increases previously expected.
Greenspan's testimony will start at 10 a.m. tomorrow. This will be his second turn on Capitol Hill this year to report broadly on Fed policy, and the first since the expiration of the law requiring his testimony. He will reprise his testimony next Tuesday to the House Banking Committee.
In prior years, these appearances were named for the 1978 Humphrey-Hawkins law. From now on, the testimony will be known by a more generic title: the Fed's report on monetary policy.
Investors are divided on whether the Fed's policy-setting Open Market Committee will focus on evidence of a slowdown and hold the overnight bank rate steady at their next scheduled meeting Aug. 22.
Investor Expectations
The implied yield on the September federal funds futures contract, directly tied to Fed's August decision, is 6.64 percent. That's 14 basis points higher than the current rate of 6.5 percent, and suggests an almost 50-50 split in opinion about what the Fed will do next.
Investors are far more certain that the Fed will decide to boost rates later this year. The November fed funds future has an implied yield of 6.74 percent, suggesting a quarter-percentage point increase in the overnight rate is likely by then. The FOMC has scheduled meetings on Oct. 3 and Nov. 15.
Greenspan is expected to keep the debate alive tomorrow. Economists expect he will return to the themes that he's been pressing in public appearances: How worker productivity gains help boost corporate profitability while keeping a lid on wage inflation, how technological innovations have permanently lifted the pace of productivity gains and how the nation's economic growth affords many more people the benefits of a job, home and other signs of success.
Growth Experiment
Such a message will underscore Greenspan's goal of appearing to embrace the view that the economy can grow faster than previously thought without setting off rising prices as increased consumer demand outstrips supply.
``He'll be trying to give us a signal that he hasn't given up on the growth experiment yet,'' said Diane Swonk, chief economist at Bank One Corp. in Chicago.
Still, Greenspan will emphasize, as he often has in the past, that 30-year lows on unemployment, heavy consumer spending, rising wealth and other signs of economic success do connote risks, as well. That's especially the case if energy prices keep rising. ``There's going to be a sense of slight militancy,'' said William Sullivan, chief economist at Morgan Stanley Dean Witter in New York. ``He's not going to close the door on additional rate hikes.''
Greenspan has an added incentive to raise the possibility of rate increases. By keeping that option, the Fed chairman may succeed in keeping stock investors from enjoying the kind of outsized gains that prompted his warning to Congress in February that the Fed would keep raising rates to ensure ``that these values will increase no faster than household incomes.'' The Nasdaq Composite Index, which posted an 86 percent increase last year, is up just 1 percent this year.
Testing Markets
``If he sees markets giving no credence to the possibility of rising rates, he'll give credence to it,'' said Michael Boldin, an economist with RFA/The Dismal Scientist, an economic consultant in West Chester, Pennsylvania.
That may trouble some members of the Senate panel, since the economic expansion has given certain constituencies -- especially minorities and young adults -- a chance at job security for the first time ever. Raising rates, some senators may argue, will only mean forcing these workers back onto the unemployment rolls. That possibility may trouble politicians as the campaign for the November presidential and congressional elections heats up.
Greenspan isn't ignorant to this criticism, and will try to head it off, said Bank One's Swonk. That's why his emphasis will be on the Fed's need to protect the stability of prices, she said.
``He will say `I share your goals','' said Swonk. ``But he will say inflation is worse on the purchasing power of consumers over the long haul, and that would put the economic expansion at risk.''
Best Regards, J.T. |
