Fed Chief Sees Solid Growth Despite Dip
The nation’s economy continues to grow solidly, with recent signs of weakness reflecting temporary events that shouldn’t slow the recovery over the longer term, Federal Reserve Chairman Alan Greenspan said Tuesday.
A pronounced dip in economic activity last month had sparked fears of a slowing economy. But Greenspan told the Senate Banking Committee that the economic “soft patch” in June was due to higher prices, which took a surprising bite out of consumer spending, and to employers’ adding fewer jobs than expected.
He expressed confidence that the rise in prices was caused by “transitory” factors, such as turmoil in international oil markets. The recovery appears to have become self-sustaining, he said, and won’t be jeopardized by a “momentary bulge” in inflation.
Indeed, inflation slowed in June after rising earlier in the year, according to government data released last week.
“Not only has economic activity quickened, the expansion has become more broad-based and produced notable gains in employment,” Greenspan said, noting that net job creation has averaged 200,000 positions a month this year, compared with 60,000 in the final quarter of 2003.
Greenspan’s upbeat remarks helped reassure stock market investors, who drove up equity prices Tuesday. Bond yields rose slightly.
In his testimony, Greenspan repeated previous predictions that the Fed would raise interest rates at a “measured” pace but said that policymakers stood ready to pick up the tempo or magnitude of rate hikes if inflationary pressures were to build.
“If we are to maintain the mandate which the Congress has given us to maintain price stability ... we will do what is required to achieve that objective,” he said.
Last month, the Fed boosted its benchmark short-term interest rate to 1.25% from 1%, the first increase in four years. Many economists have predicted that the Fed will continue to raise rates in quarter-point increments as the recovery continues, with the next hike expected to occur when Fed policymakers meet Aug. 10.
