Federal Reserve Chairman Alan Greenspan said today that the economy seems to be on a "reasonably firm footing," with inflation under control.
WASHINGTON — Federal Reserve Chairman Alan Greenspan said today that the economy seems to be on a “reasonably firm footing,” with inflation under control.
In his most extensive remarks on the state of the economy since February, Greenspan said that a recent uptick in economic indicators showed the soft readings of the early spring were not signaling a more serious slowdown in the pace of activity.
Greenspan’s generally upbeat assessment of the economy provided support for the view that the Fed, which has raised interest rates eight times over the past year, planned to continue nudging rates higher at a gradual pace.
“The U.S. economy seems to be on a reasonably firm footing, and underlying inflation remains contained,” Greenspan said in remarks to the congressional Joint Economic Committee.
Greenspan said because of this the Fed was able at its last meeting to repeat a pledge it has been making for the past year that it will be able to move rates higher “at a pace that is likely to be measured.”
Fed policy-makers next meet on June 29-30 and it is widely expected that the Fed will raise a key short-term rate, the federal funds rate, by another quarter-point to 3.25 percent at that time.
Many analysts believe that the Fed will keep raising rates by a quarter-point at later meetings this year, but others think the Fed may decide to pause in the rate hikes later in the summer or early fall.
Sen. Robert Bennett, R-Utah, said he believed that the drop in long-term rates was a vote of confidence by financial markets in the ability of the Federal Reserve to keep inflation rates low.
He said that might suggest that the Fed should stop raising rates after two more increases in June and August, leaving the funds rate at 3.5 percent. Bennett suggested that might be the “neutral” level, where the Fed is neither stimulating economic growth or holding it back.
“Maybe the markets are saying we like the way you are handling inflation and we like the measured pace that you have adopted,” Bennett told Greenspan.
Greenspan did not respond directly to the suggestion that a funds rate of 3.5 percent might be the place to stop raising rates. But he said when the Fed does get the rate to a neutral level, “we will probably know it when we are there because we will perceive a degree of balance we have not perceived before.”
Greenspan offered no specifics on how the Fed will handle interest rates going forward but he did give a generally upbeat assessment of the economy’s performance.
He said that the economy has “alternately paused and quickened” this year, fluctuations that he blamed in large part on the rise and fall in energy prices.
“Despite the uneven character of the expansion over the past year, the U.S. economy has done well, on net, by most measures,” Greenspan said.
Greenspan said that overall economic growth, as measured by the gross domestic product, has grown at a healthy pace of 3.7 percent over the past year, helping to push the unemployment rate down to 5.1 percent in May, the lowest level since September 2001.
Greenspan said one of the “biggest surprises of the past year” has been the performance of long-term interest rates.
The 10-year Treasury note is now around 4 percent, down from 4.8 percent when the Fed started raising short-term rates in late June 2004. Since that time, the funds rate has been pushed from a 46-year low of 1 percent to the current level of 3 percent.
This divergence between short-term and long-term rates “is clearly without recent precedent,” Greenspan said.
In answer to questions, Greenspan said that the Fed was “spending a considerable amount of time” trying to understand the impact on the economy from the divergence in short-term and long-term rates.
Normally, the Fed is able to control inflation pressures by pushing up short-term interest rates, which it controls, and having those increases reflected in higher long-term rates, which are set by financial markets. But with long-term rates falling, the Fed’s ability to slow the economy to control inflation is lessened.
Greenspan said at this point overall inflation pressures “remain modest” but he said the Fed would carefully watch inflation pressures going forward.
The drop in long-term rates has fueled a boom in home sales and increases in home prices. But Greenspan repeated his view that he doesn’t believe there is a national housing bubble. He said, however, there could be some “froth” in local markets.