NYTimes.com Article: Fed Chief Gives Bright Outlook; Steady on Rates

This article from NYTimes.com 
has been sent to you by tganesh@stlawu.edu.


The enigma of Greenspan - everything he says appears as weighty as the Delphic 
oracle.  His predictions, it is assumed, arem bound to happen, and it will 
happen as long as everyone trusts that it is going to happen.  There is nothing 
wrong with the economy, unemployment will come down, the mounting deficits are 
no indication of the stormy days ahead, and the invasion of Iraq was ultimately 
good for the US.  What is amazing is the extent to which every administration 
seeks the endorsement of Greenspan.

tganesh@stlawu.edu

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Fed Chief Gives Bright Outlook; Steady on Rates

July 16, 2003
 By DAVID FIRESTONE with JONATHAN FUERBRINGER 




 


WASHINGTON, July 15 - The Federal Reserve is prepared to
hold interest rates low "for as long as needed" to
stimulate further growth, the chairman, Alan Greenspan,
said today, even as he presented an unexpectedly upbeat
economic forecast to a House committee. 

Leaving open the possibility of further rate cuts, Mr.
Greenspan discounted speculation that the Fed could not
lower its funds rate much lower than its current 1 percent
- already the lowest rate in 45 years. The central bank
could easily bring the rate down further if conditions
worsen, he said, even if that forces money-market funds to
pay almost no interest. 

That reassurance failed to sway the bond market, where Mr.
Greenspan's sunny predictions ignited a sell-off. The yield
on the Treasury's 10-year note rose to 3.99 percent, from
3.73 percent on Monday, as more investors seemed to decide
that the economy will pick up speed later this year,
possibly spelling an end to the bond rally that has lasted
three and a half years. 

The bond market was also jolted by Mr. Greenspan's comment
that the Fed was unlikely to try to keep interest rates in
check by buying large amounts of longer-term securities.
Bond prices, which move in the opposite direction of
interest rates, also fell on the Bush administration's
acknowledgment today that the federal budget deficit would
be much larger this year and next. That means the
government will be issuing even more debt, increasing the
supply of bonds in the market, which can be expected to
depress bond prices while putting additional upward
pressure on interest rates. 

Stocks ended the day down slightly, which analysts
attributed to the bond market's reversal and the
possibility that mortgage refinancing may begin to slow. 

Most of Mr. Greenspan's testimony to the House Financial
Services Committee today was a bright collage of indicators
showing a recovery ahead, and he even praised the Bush
administration's tax cut for increasing household income
and leading to higher consumer spending. But he went out of
his way to assure lawmakers that the economy had not yet
reached the point at which the Fed would contemplate
bringing interest rates up. 

"If the recovery is indeed fragile, I would suggest to you
it is unlikely that we would be moving rates," he told
committee members as part of his required twice-yearly
economic report. "We would seek significant improvement in
the performance from what we currently see, before that is
even on the table." 

Even though bond investors were rattled, the chairman's
optimistic forecast was largely welcome news for the White
House, which has struggled to defend the invasion of Iraq
and was forced today to explain why the federal deficit had
risen to new heights. In testimony that echoed the
administration's own optimism, Mr. Greenspan presented
several indicators that the economy's vigor might be
returning. 

Industrial production has finally stopped falling, he said,
and the housing market remains strong. Investors are more
willing to confront risk, he said, improving the credit
market. Economic growth could be as high as 2.75 percent
this year, according to a separate Fed report submitted to
Congress today, and as high as 4.75 percent next year,
which economists at Goldman, Sachs said was a surprisingly
robust prediction. 

And Mr. Greenspan sounded positively cheery about the rise
in household wealth, which he said was aided by mortgage
refinancing and President Bush's tax cuts. 

"The recently passed tax legislation," he said, "will
provide a considerable lift to disposable incomes of
households in the second half of the year, even after
accounting for some state and local offsets." The next few
months, he said, will be an important test of the
administration's theory that its tax cuts will fuel a
recovery. 

As he often does in Congressional appearances, Mr.
Greenspan worked to balance his hopes for a recovery with
the fear of investors that too much economic improvement
will lead the Fed to raise interest rates to ward off
inflation. 

He acknowledged, in advance of highly critical comments
from several committee Democrats, that unemployment keeps
moving up and that the tax cuts have increased the federal
budget deficit - all arguments for keeping rates low. But
he said that in many cases, unemployment has resulted from
improved business productivity that has enabled work forces
to be cut. And the deficit is not necessarily a problem, he
said, unless it persists for many years, which he said
could be prevented by government spending cuts that match
the reductions in taxes. 

Mr. Greenspan's relentless placidity seemed to infuriate
many committee Democrats, who demanded that he reconcile
his outlook with the reality of growing joblessness. 

"Where is the momentum in this economy?" asked
Representative Joseph Crowley, a Democrat who represents
the borough of Queens in New York City. "For the past few
sessions here, you have predicted job growth and wealth
creation, and all we have seen, at least in my city, is
more job loss and the loss of wealth." 

The strongest criticism came from Representative Bernard
Sanders of Vermont, an independent and the only socialist
member of the House, who accused Mr. Greenspan of serving
the needs of the wealthy while ignoring the economic
distress of working-class families. 

"I think you just don't know what's going on in the real
world," Mr. Sanders said. "And I would urge you, come with
me to Vermont; meet real people. The country clubs and the
cocktail parties are not real America. The millionaires and
billionaires are the exception to the rule." 

Republican members of the committee were for the most part
delighted by Mr. Greenspan's praise for the stimulative
effects of the tax cuts, and for his endorsement of the
need for more spending cuts. 

"I have nothing against cutting taxes," Mr. Greenspan said.
"I would just like to be sure that a constituency arises
eventually for cutting spending as well, and that has not
been the case." 

So in other words, asked Representative Spencer Bachus,
Republican of Alabama, tax cuts are good if they are
followed by spending cuts or limits on spending? 

"Correct," Mr. Greenspan replied, eliciting a nod of
satisfaction from several on the Republican side. 

Democrats on the committee had hoped to make use of the
White House report showing a budget deficit of $455 billion
this year, the largest in history, but Mr. Greenspan
refused to criticize the administration for helping create
the gap. Representative Barney Frank of Massachusetts, the
ranking Democrat on the committee, tried repeatedly to have
Mr. Greenspan say how long such deficits could be sustained
without damaging the economy. But the chairman would not
bite. 

"You're trying to avoid talking about it," Mr. Frank said.
"I think you're not facing up to the implications of your
own report." 

Mr. Greenspan has a recent history, however, of predicting
turnarounds that have failed to materialize on schedule. In
May 2001, he said there was "ample evidence that we are
experiencing only a pause in the investment in a broad set
of innovations." But the pause has lasted more than two
years. And in March of last year, he said that the job
market seemed to be improving, a prediction that occurred
before an additional 519,000 jobs were lost. 

In today's report, he predicted that unemployment, now at
6.4 percent, would decline to 5.5 to 6 percent by the final
quarter of 2004. 


http://www.nytimes.com/2003/07/16/business/16FED.html?ex=1059389094&ei=1&en=022fd5e3f55f6c13


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