Greenspan Upbeat on Efforts to Curb Inflation

Federal Reserve Chairman Alan Greenspan offered a surprisingly optimistic assessment Thursday of the economy’s chances for slowing enough to staunch inflation without a recession.

Although Greenspan--during congressional testimony--issued some of his standard warnings about the danger of rising prices, they were fewer and farther between than usual.

Analysts said their comparative absence is striking because Greenspan’s remarks came only one day after the nation posted its largest-ever trade deficit and two days after the government issued new figures showing that wages and prices are picking up some steam.

“I’m surprised,” said Allen Sinai, chief global economist with Primark Decision Economics in Boston. “The central bank does not seem especially concerned or alarmed about inflation.”

Greenspan’s testimony suggested that the Fed is near the end of its yearlong campaign of inflation-squashing interest rate hikes, and that was just what investors wanted to hear.

Bond yields fell sharply in the wake of Greenspan’s comments, sparking a rally in the stock market.

Greenspan was tentative about whether American consumers, whose feverish spending is largely responsible for the nation’s record-breaking boom, are coming to the end of their long buying spree. But he said that if they are, the development would help the economy by reducing imports and easing inflationary demands for more workers and higher wages.

“Should these trends toward supply-and-demand balance persist, the . . . need for ever-rising imports and for a further draining of our limited labor resources should ease or, perhaps, even end,” he told the Senate Banking Committee. “Should this favorable outcome prevail, the immediate threat to our prosperity from growing imbalances in our economy would abate.”

The Fed signaled last month that it thought the worst of the inflation threat was over when it left unchanged the short-term interest rates it controls. But the central bank coupled that decision with a blunt warning that it would resume its rate-hike campaign if the economy turned out to be stronger than expected.

The comparative lack of warnings Thursday suggests that Greenspan is increasingly confident the Fed can engineer a “soft landing” of continued but slower growth for the economy. Polls show that economists and the public almost universally expect the central bank to pull off the feat, despite the fact that it rarely has been able to do so.

“He sounded much more optimistic and less hawkish than I’d expected,” said David M. Jones, chief economist with Aubrey G. Lanston in New York. “He seems to be saying he is getting what he wants from the economy.”

Greenspan said the Fed’s efforts to slow the economy are being helped by a variety of trends beyond its immediate control. Among them: the recent stumble in the stock market and a rise in household debt, both of which are making people feel less wealthy and so less ready to spend, and a jump in oil prices, which the central banker said was equivalent to a 1% tax on disposable income.

Over the last year, the central bank has raised the so-called Fed funds rate, the rate at which banks make short-term loans to each other, six times in an effort to slow growth by boosting borrowing costs to consumers and businesses. The effort has added 2 percentage points to the rate and left it at a nine-year high of 6.5%.

The latest evidence of the increases’ effect came in statistics released Thursday showing that housing starts tumbled 2.6% in June to a seasonally adjusted rate of 1.554 million units. Statistics tracking auto, appliance and furniture sales have shown similar trends in recent weeks.

Even if the economy is slowing, Greenspan still faces a substantial job to meet the Fed’s latest forecast that the economy will grow between 4% and 4.5% for the full year. It grew at a 5.5% rate in the first quarter.

“It’s an open question how much of a slowdown they can get and how much inflation will respond,” said Sinai, the Boston-based economist.”