The strength of the U.S. economic recovery is “still uncertain” and inflation pressures are “largely absent,” which means Federal Reserve officials probably won’t have to raise interest rates any time soon, Fed Chairman Alan Greenspan said.
“Prospects for low inflation and inflation expectations in
the period ahead mean that the Federal Reserve should have ample
opportunity to adjust policy to keep inflation pressures contained
once sustained, solid, economic expansion is in view,” Greenspan
told the Joint Economic Committee of Congress.
Rhode Island's Market Has Changed. Developers, Builders, Investors and Sellers Must Change With It.
By Emilio DiSpirito IV License Partner | Engel & Völkers Oceanside Leader | The DiSpirito…
Learn More
Greenspan said members of the Fed’s policy-making Open Market
Committee had noted in a statement after their March 19 meeting
that while “the economy is expanding at a significant pace,” how
much consumer and business demand strengthens remains an open
question. During that meeting, policy makers left the benchmark
overnight bank lending rate at a 40-year low of 1.75 percent.
“Little, if anything, has happened since the FOMC meeting to
alter that assessment,” Greenspan said.
“The U.S. economy has displayed a remarkable resilience over
the past six months in the face of some very significant adverse
shocks,” he said. “But the strength of the economic expansion
that is under way remains to be clarified.”
Treasury Market
U.S. Treasury securities pared losses after the Fed
chairman’s remarks suggested policy makers may wait before raising
interest rates. The 4 7/8 percent February 2012 note fell 1/8
point, pushing up its yield 2 basis points to 5.21 percent. It had
been as high as 5.23 percent. A basis point is 0.01 percentage
point.
“People expecting the Fed to tighten in June are going to be
disappointed,” said John Silvia, chief economist at Wachovia
Corp. in Charlotte. “It just sounds as if this guy is just not
ready to pull that trigger” and raise rates.
Employment is the “most central” factor in the economic
outlook, “which has improved some in recent months,” Greenspan
said. While unemployment has lagged growth “in typical fashion,”
the pace of layoffs has “diminished noticeably,” he said.
Some of the forces that had weighed on the economy over the
past year, including a rapid sell-off of business inventories,
have “begun to dissipate” and “prospects have brightened” for
the economy. Still, other factors “such as the sharp increase in
world oil prices have arisen that pose new challenges,” Greenspan
said.
Energy Costs
Higher energy prices may take a toll on consumer spending,
“sapping the purchasing power of households,” he said. If prices
stay in their current range, the effect “will be limited,”
Greenspan said.
“However, a price hike that drove oil prices well above
existing levels for an appreciable period of time would likely
have more far-reaching consequences,” he said.
Complicating the Fed’s job is the fact that statistical
models officials use have a limited capability to assess the
effect of higher oil prices, he said.
The decline in stock prices over the past months may also be
a drag on spending, particularly for upper-income households, the
Fed chairman said.
Policy makers are watching rising levels of consumer debt.
“Although high-income households should not experience much
strain in meeting their debt-service obligations, others might,”
Greenspan said. “Indeed, repayment difficulties have already
increased, particularly in the subprime markets for consumer loans
and mortgages.”
Consumer Spending
Still, “large erosions” in consumer spending “do not seem
likely,” he said, “and the overall levels of debt and repayment
delinquencies do not, as of now, appear to pose a major impediment
to a moderate expansion of consumption going forward.”
Low mortgage rates and favorable weather have helped keep
homebuilding strong in recent months, Greenspan said. Americans
have taken advantage of low rates to refinance their homes, using
the equity taken out to buy more goods and services.
A drop in mortgage rates in recent weeks “should continue to
underpin activity in housing, but with perhaps less spillover to
consumption more generally,” he said.
The strength in the housing market has raised some concern
about a “bubble” in home prices, Greenspan said. Still, the cost
of buying and selling homes, and the effort of moving, should
limit the danger, he said. Stock market turnover is more than 100
percent annually, and homes turn over at a less than 10 percent
annual rate, he said, “scarcely tinder for speculative
conflagration.”
Because consumer spending remained strong through the
recession that began in March 2001, it won’t give a big boost to
the recovery, Greenspan said. That means business spending has to
pick up, which is likely in the months ahead, he said.
Business Investment
Business managers are still anxious about increasing their
investments in computers and other high-technology goods, which
should happen as profit margins rise, he said.
“Recent evidence suggests that a recovery in at least some
forms of high-tech investment is under way,” Greenspan said.
Semiconductor production is up, as are expenditures on computers.
Overcapacity remains “substantial” in telecommunications, and
aircraft investment will “presumably” remain weak, he said.
“On balance, the recovery this year in overall spending on
business fixed investment is likely to be gradual,”Greenspan
said.
During the recession, companies focused on making their
existing workforces more productive, “and here the most recent
readings have been very encouraging,” Greenspan said.
“This development augurs well for firms’ ability to grant
wage increases to their employees without putting upward pressure
on prices,” he said.
With interest rates low, productivity “well maintained”
and “inflation pressures largely absent,” Greenspan said “the
foundation for economic expansion has been laid.”
Bloomberg News
