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Articles: US economy remains solid - Greenspan

Posted by admin on Wednesday, July 21, 2004 - 12:37 AM

US Federal Reserve chairperson Alan Greenspan said on Tuesday he cannot rule out steeper-than-expected interest rate increases as the economy moves into a broader, jobs-rich expansion.
"Not only has economic activity quickened, but the expansion has become more broad-based and has produced notable gains in employment," Greenspan told a senate banking panel as he delivered the central bank's semi-annual economic outlook. Strengthening demand, coupled with "transitory" factors such as sizzling energy prices, had pushed up inflation, which in turn led to softness in the powerful economic engine of consumer spending. But the softness in spending "should prove short-lived," the central bank chief said. "With the growth of aggregate demand looking more sustainable and with employment expanding broadly, the considerable monetary policy accommodation put in place in 2001 is becoming increasingly unnecessary," he said. Federal Reserve policymakers on June 30, raised the target for the federal funds rate, which commercial banks charge each other overnight, to 1.25 percent from a 1958 low of one percent. Federal Open Market Committee (FOMC) members expect to raise interest rates at a "measured" pace but have promised to act more swiftly if inflation runs out of control. There was "considerable uncertainty" over the outlook for price pressures, Greenspan said. For the moment, global competition and surplus US production capacity appeared to have tamed inflation, he sad. Moderately rising labour costs did not appear a threat. "But we cannot be certain that this benign environment will persist and that there are not more deep-seated forces emerging as a consequence of prolonged monetary accommodation," Greenspan warned. The economy should adjust relatively smoothly if interest rates rise gradually, Greenspan said. "Even if economic developments dictate that the stance of policy must be adjusted in a less gradual manner to ensure price stability, our economy appears to have prepared itself for a more dynamic adjustment of interest rates," he added. "In either scenario, individual instances of financial strain cannot be ruled out." The bond market sold off on the perception that rates may rise faster, pushing up the yield on 10-year Treasury bonds to 4.442 percent from 4.376 percent just before the central bank boss began speaking. Greenspan presented congress with a semi-annual economic report by the Federal Reserve, which foresaw relatively solid economic prospects despite some recent signs of softness. In June, employers hired 112 000 extra workers, fewer than half the number expected, retail sales fell by a seasonally adjusted 1.1 percent, and US industry cut output 0.3 percent. But the Federal Reserve only slightly trimmed a 2004 real economic growth forecast to a range of 4.5 to 4.75 percent from a previous forecast in February for growth of 4.5 to five percent. It predicted growth of 3.5 to four percent next year. Prices paid by consumers, excluding food and energy, should rise by 1.75 to two percent this year, and 1.5 to 2.0 percent in 2005, it said. It was the first time the bank had provided a "core" personal consumption expenditure forecast. The forecasts were based on a comparison of the fourth quarter with the same period the previous year.

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