Greenspan Hints at More Rate Hikes

Federal Reserve Chairman Alan Greenspan declared Wednesday that the U.S. economy marched into the new year in sound shape and suggested that the Fed’s campaign to gradually raise short-term interest rates was not over.

“All told, the economy seems to have entered 2005 expanding at a reasonably good pace, with inflation and inflation expectations well anchored,” Greenspan told the Senate Banking Committee in his semiannual economic assessment for Congress.

In the last eight months, the Fed has raised its benchmark short-term federal funds rate -- which governs overnight loans between banks -- to 2.5% from 1%. That low rate was intended to help pull the economy out of the 2001 recession and cope with that year’s terrorist attacks.

But 2.5% is still a historically low level, Greenspan said, suggesting further increases.

Some Senate Banking Committee members of both parties challenged the continuing rate increases as endangering economic growth.

“It seems to me that the Fed should consider now taking a pause from its policy of interest rate increases to see how the economy develops in the first part of this year,” said Sen. Paul S. Sarbanes of Maryland, the top-ranking Democrat on the committee.

“You don’t have to raise rates just because many expect it,” said Sen. Jim Bunning (R-Ky.). “Low interest rates are not necessarily a bad thing.”

But private economists said they heard nothing from Greenspan to suggest other than further rate increases.

“The chairman’s comments offered no reason to alter our forecast that the Fed would boost the funds rate to 4% by year-end 2005,” said Susan Hering, a Chicago-based economist at investment house UBS.

Bill Dudley, chief domestic economist for Goldman Sachs in New York, said he found Greenspan to be uncertain about economic conditions and the course of Fed policy. “This suggests that no immediate shift in policy is likely,” Dudley said. “But given the chairman’s professed uncertainty about the economic outlook, it is hard to infer much more than this.”

Goldman Sachs said in an analysis of Greenspan’s testimony that the Fed was trying to keep inflation at 1.5% to 1.75% a year.

On Wall Street, Greenspan’s remarks triggered a modest increase in bond yields, but stock prices barely budged.

Greenspan contrasted the stance of business executives, who remain wary of investing in new plants and equipment, with households, which are spending 99% of what they are earning, leaving the savings rate precariously near zero.

Always a worrier, Greenspan said: “History cautions that people experiencing long periods of relative stability are prone to excess. We must thus remain vigilant against complacency, especially since several important economic challenges confront policymakers in the years ahead.”

High on his list of challenges was the impending retirement of the baby boom generation, which will strain the systems in place for supporting them when they are not working.

Another crucial long-term economic challenge, Greenspan said, “is the need to ensure that our workforce is equipped with the requisite skills to compete effectively in an environment of rapid technological progress and global competition.”