Greenspan to Testify Before Congress

Federal Reserve Chairman Alan Greenspan, in probably his last semiannual testimony to Congress, is expected to paint an upbeat picture of growth this week but drop no hint that the Fed is ready to pause in raising interest rates.

Greenspan, due to retire Jan. 31, will address Congress on Wednesday and Thursday. He also might air his views on the country’s housing market and the “conundrum” of low long-term bond yields.

But the performance will be most closely watched for clues of whether the central bank is weighing an end to its yearlong credit-tightening campaign. Economists think Greenspan will do no such thing.

“He will give no indication at all that the Fed is near the end of raising short-term interest rates,” said Lyle Gramley, a former Fed governor now at the Washington-Stanford Research Group. “Quite the contrary. I think he will caution Congress on the need to continue raising interest rates.”

The central bank has lifted the overnight federal funds rate in nine quarter-percentage-point steps to 3.25% from June 2004 and is forecast by financial markets to raise the rate to 4% by the end of this year.

Recent strong economic data, notwithstanding tame reports of inflation, have reinforced speculation the central bank is still months away from even thinking about a pause.

The Federal Open Market Committee “is tightening to get rates back up to neutral before there is any sign of inflation pressures,” said Dean Maki, chief U.S. economist for Barclays Capital in New York and a former Fed officer. “The fourth quarter is the earliest they could consider a pause. The rhetoric is consistent with at least a few more rate hikes.”

Recent comments from committee members have indeed signaled they harbor little doubt that rates need to keep moving higher.