Greenspan Signals Fed Won’t Raise Rates Soon

The nation’s economy is as good as it gets, an ebullient Federal Reserve Board Chairman Alan Greenspan told Congress on Wednesday, with the country locked in a “virtuous cycle” of low unemployment, negligible inflation, easy credit and booming stock prices.

Greenspan also indicated that he was not preparing an interest rate boost any time soon, as the Fed has not found “the need to tighten policy in response to strong demand,” he said in his semiannual report to Congress on the state of the economy.

The prospect of no immediate Fed rate hikes led investors to drive down yields on long-term bonds to near-record lows. The yield for the benchmark 30-year Treasury bond fell to just under 5.70% from 5.78% late Tuesday. Such lower yields could push down rates for mortgages and other loans.

However, Greenspan held out the possibility of interest rate hikes in the future should there be signs of higher inflation or an overheated economy. And the Fed chief also cited an unusually high degree of uncertainty because of the continuing economic turmoil in Asia. Concerns about the Asian crisis as well as sharp falls in Asian stock markets Tuesday led to a decline of U.S. stock prices.

Normally opaque in his language and guarded in his forecasts, the Fed chairman offered nothing but happy talk before the hearing of the congressional Joint Economic Committee. He confessed that he had never seen better times in “my nearly half-century of daily observation of the American economy.”

Because of high demand for labor, Greenspan said, workers are enjoying rising wages, “many chronically underemployed people have been given the opportunity to work,” and “welfare recipients appear to have been absorbed into the work force in significant numbers.”

However, he said, tight labor markets haven’t spurred any significant wage hikes that could lead to price increases, touching off a general round of inflation. Instead, workers who are worried that changing technology may make their job skills obsolete have accepted modest salary increases, apparently trading wages for job security.

In previous business expansions, workers often required “substantial increases in pay just to cover increases in the cost of living,” Greenspan noted. But the current boom, he said, is far different: “Consumer prices have been generally well-behaved.”

In fact, he said, inflation kept declining in the first three months of this year “even as the economy strengthened.” The national jobless rate is 4.3%, lowest since 1970, and prices are rising at an annual rate of just 1.4%.

The business boom is in its seventh year and shows no signs of abating. “Our economy is still enjoying a virtuous cycle,” Greenspan said.

Greenspan’s testimony came just three weeks before the Fed’s next policy meeting June 30-July 1, at which the central bank would determine if a rate hike is needed to cool the economy.

The prospect that the Fed won’t raise rates cheered some analysts.

“This is about as good news as you can get from Chairman Greenspan,” said Sung Won Sohn, chief economist at Norwest Corp. in Minneapolis. “He told us he is not going to take the punch bowl away from this wonderful party we have been enjoying in the economy and the financial markets.”

The stock market boom has added about $12 trillion to household assets since the end of 1994. Most of that huge sum is unrealized capital gains, but a few percentage points have been “transformed into the purchase of goods and services in consumer markets,” Greenspan said.

“That increment to spending, combined with the sharp increase in equipment investment . . . has propelled the economy forward,” he said.

Associated Press was used on compiling this report.