Greenspan Signals No Imminent Hike in Interest Rates
Federal Reserve Chairman Alan Greenspan signaled Tuesday that the Fed is unlikely to raise interest rates soon, but he said it remains unclear how long economic conditions will let the central bank forgo further tightening.
In his semiannual testimony before Congress, Greenspan said the economy has slowed from its dangerously fast pace of earlier this year, and he predicted inflation and unemployment will stay low into 1998.
But he warned that at least some of the economy’s good fortune is apt to prove temporary, saying he has “no doubt” the Fed eventually will have to tighten its money and credit policies if inflation pressures intensify. He offered no hint, however, when he thought that might be.
Greenspan’s generally upbeat assessment--and his failure to lecture the stock market against “irrational exuberance,” as he did earlier this year--sent financial markets surging.
The Dow Jones industrial average soared 154.93 points, or 2%, closing at 8,061.65--above the record finish of 8,038.88 that the stock market posted last Wednesday. Bond yields tumbled on the chairman’s comments, with the bellwether 30-year Treasury bond yield falling to a seven-month low of 6.42% from 6.54% Monday.
Robert G. Dederick, economist at Northern Trust Co. of Chicago, said investors were relieved that the Fed chairman was “nonthreatening” in his testimony. “They liked what they didn’t hear,” Dederick said.
Richard B. Berner, analyst for Mellon Bank in Pittsburgh, Pa., agreed. “The basic point to his testimony was that there is no sense of urgency about inflation,” Berner said. “The market was relieved.” As part of his appearance, Greenspan made public a 25-page report on money and credit policies, required under the 1978 Humphrey-Hawkins Act, in which the Fed forecasts further improvement in the economy.
The forecast includes these elements:
* The economy is likely to grow by between 3% and 3.25% this year, after adjustment for inflation, slowing to a 2% to 2.5% pace in 1998. Growth is already slowing from the 5.9% pace recorded earlier this year.
* Inflation will remain in the 2.25% to 2.5% range this year, rising to 2.5% to 3% in 1998--a modest speedup from the current pace, but still within acceptable bounds.
* The nation’s unemployment rate will remain at between 4.75% and 5% through the rest of this year and into 1998--its lowest level in 24 years and a far better performance than economists expected.
Greenspan said in his testimony that Fed policymakers were “reasonably confident that inflation will be quite modest for 1997 as a whole,” and will accelerate only modestly in 1998.
At the same time, he warned, the medium-term picture is clouded, and he has “no doubt that the current stance of policy . . . will need to be changed at some point”--possibly by raising interest rates.
“For the present . . . demand growth does appear to have moderated,” he said, “but whether that moderation will be sufficient to avoid putting additional pressures on resources is an open question.”
The Fed last raised interest rates in March, when it boosted the so-called federal funds rate--the interest rate that commercial banks charge each other on overnight loans--to 5.5%, from 5.25%.
As he has before, Greenspan ran into criticism from a handful of liberals who charged that the Fed was so concerned about inflation that it was refusing to allow the economy to grow as rapidly as it should.
At one point, Rep. Bernard Sanders (I-Vt.) accused Greenspan of catering to the desires of financial markets at the expense of what he called “working-class” Americans.
Greenspan vigorously denied any such biases. “I think you are just mistaken . . . as to what a bunch of old fogeys you think we are,” he told Rep. Barney Frank (D-Mass.) after one exchange.
At another point, he flatly denied that the Fed was “starting off with the proposition that inflation is a big bogey [man] and that we will construct all sorts of arguments . . . to make to thwart it.”
He told members of the House Banking and Financial Services Committee that the Fed’s purpose “is to maintain maximum sustainable economic growth. That leaves open the question, what is the best way of doing that?”
Greenspan also cautioned that Fed policy-makers must be cautious in assessing contentions that the economy may be undergoing changes that might allow it to grow faster without rekindling inflation. Some economists have argued that technological advances such as computers have brought about improvements in productivity--or output per work hour--that help keep inflation down.
Greenspan argued that although there are some signs that such changes may be underway, the jury still is out on whether they will prove to be permanent.
“We do not now know, nor do I suspect can anyone know,” he said.
On other issues, Greenspan again opposed calls by some Democrats to increase the federal minimum wage to $6.50 an hour--from $4.75 now and $5.25 on Sept. 1--arguing that it might discourage employers from hiring inexperienced workers.
He also reiterated his support for exempting capital gains--profits from the sale of stocks or other assets--from taxation entirely. The current tax, he contended, “curbs economic growth and rising standards of living.”
Despite the barbs from some liberals, the criticism from members of the Banking Committee this time was far less than Greenspan encountered during similar testimony last winter, just after the Fed raised interest rates.
The fact that the economy appears to be slowing from the first quarter’s frenetic 5.9% pace has been welcomed by economists, who feared that the previous rate would rekindle inflation pressures.
However, many analysts--including some at the Fed--expect the growth rate to speed up slightly toward the end of this year and the beginning of 1998 after consumers, who are now taking a breather from their earlier spending spree, step up their purchases.
* MARKET BEAT: Even if Greenspan didn’t say so this time, stocks are risky now, Tom Petruno writes. D1
