View Full Version : Greenspan: Economy Regaining Traction

09-08-2004, 12:36 PM
WASHINGTON (Reuters) - The U.S. economy is pulling out of its recent soft patch and appears to be picking up steam, Federal Reserve (news - web sites) chief Alan Greenspan (news - web sites) said on Wednesday in remarks economists saw as cementing a September rate rise.

"The most recent data suggest that, on the whole, the expansion has regained some traction," the U.S. central bank chairman told the House of Representatives Budget Committee.

Still, Greenspan was not as bullish in his 2-1/2 hours on Capitol Hill as some investors had expected. That, coupled with his lack of concern about the impact of oil prices on inflation, set the euro surging against the U.S. dollar on expectations for a gradual tightening cycle.

"Despite the rise in oil prices through mid-August, inflation and inflation expectations have eased in recent months," the Fed chief said.

"If it weren't for the oil price spike, I would be very optimistic about where the economy is going," Greenspan said later in response to lawmaker questions.

But he warned lawmakers not to ignore the danger of "stagflation" -- high inflation and low growth -- posed by a lasting budget deficit if the country fails to fix budget imbalances before an approaching surge in retirees strains government finances further.

Economists saw his overall tone as marginally more upbeat than the Fed statement that followed its last policy meeting, when it raised interest rates by a quarter percentage point to 1.50 percent, the second increase this year.

A Reuters poll on Friday forecast the Fed would raise rates by another quarter point at its Sept. 21 meeting.

"The chairman's remarks clearly signal rates will rise this month, though we remain of the view that a November hike is not yet a done deal," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.


Many of the analysts polled saw the bellwether federal funds rate at 2 percent by year-end, implying no rate rise at either the November or December meetings.

There are also differing views on how far the Fed will hike borrowing costs next year.

"Mr. Greenspan's comments have opened the door to a pause in the rate tightening cycle. That's what triggered this dollar pullback," said Alex Beuzelin, a currency analyst at Ruesch International in Washington.

The pace of U.S. growth slowed sharply in the second quarter to 2.8 percent from 4.5 percent in the previous three months as record oil prices crimped spending. The key question for investors is whether this softness has endured.

Greenspan said consumer spending and housing starts had rebounded in July and business investment remained on a solid upward trend, but he noted early readings on retail sales in August have been mixed.

He pinned the blame for the slowdown squarely on the oil spike, which forced light U.S. crude to within sight of $50 per barrel during the U.S. summer.

But the central bank chairman said it was tough to assess the future course of oil prices or how they would affect the economy, although conditions were ripe for more volatility.

"Future balances between supply and demand will remain precarious," he said.


Turning to the politically charged issue of the budget, Greenspan said the record deficit should shrink this year but long-term problems still lurk.

"With the economy continuing to improve, the deficit is more likely to decline than to increase in the year ahead," he said. "Nonetheless, the prospects for the federal budget over the longer term remain troubling."

He said current fiscal policy should aim at keeping debt levels as low as possible and repeated his call for the renewal of lapsed rules to enforce more budget discipline.

"We're going to be running into very severe pressures in later years, and the better we are prepared in moving into that period, the more likely it is that we will address it in a rational, sensible rational way," Greenspan said.

The Fed chief reiterated that he feared Social Security (news - web sites) and Medicare programs were not sustainable in their current form, but steered clear of offering policy prescriptions.

09-08-2004, 12:46 PM
That's GREAT NEWS, isn't it jAZ, mememe, et al? :thumb:

Matt Helm
09-08-2004, 12:48 PM
Please don't confuse the issues with the truth. It will drive some of the people here over the edge!!

Got any more?

09-08-2004, 12:49 PM
Cue jAZ to come in here and quote one sentence that by itself sounds bad, and remind us that the sky is falling.