Greenspan - Economy has 'picked up'

Wednesday, April 21, 2004

WASHINGTON -- Alan Greenspan said Tuesday the economy has "picked up again," but the Federal Reserve chairman also talked about the possibility of higher interest rates, and that sent stock prices downward.

Greenspan, who spoke at a Senate Banking Committee hearing, did not say what central bank policy-makers would be doing about short-term interest rates.

But he told senators the banking system was well prepared to deal with rising rates, a statement investors interpreted as suggesting the Fed was at least considering an increase.

Fed policy-makers have held a key short-term interest rate at a 45-year low of 1 percent since last June. Many private economists believe the Fed will leave rates alone at its next meeting on May 4.

Asked by the committee chairman, Sen. Richard Shelby, R-Ala., if Greenspan felt optimistic about the economy and job creation, the Fed chief responded: "I do."

"Things have picked up again," Greenspan said. "March was a good month, and we moved into April with retail sales doing reasonably well."

After months of lackluster employment gains, the economy added 308,000 jobs in March -- the most in four years. That raised hopes among private economists that the labor market was turning an important corner.

With the economic momentum, some companies are finding it easier to raise prices. The government reported last week that consumer prices jumped by 0.5 percent in March.

But Greenspan indicated he did not foresee inflation becoming a problem. "Inflationary pressures will be reasonably well contained" so long as companies continue to produce healthy productivity gains, he said.

Overall on the economy, "the news is good," Greenspan said.

On the state of the banking sector, which was the subject of the hearing, Greenspan said the banking system is in good shape to deal with rising interest rates.

"In general, the industry is adequately managing interest-rate exposure," Greenspan said in prepared testimony.

Low mortgage rates over the past several years have kept banks busy on the consumer side of the business, especially in providing loans for people to buy homes or refinance the ones they already own.

As the economy rebounds, increasing the chance the Fed may boost short-term interest rates this year, long-term rates, such as those for mortgages, have risen recently.

"Many banks seem to believe that as rates rise -- presumably along with greater economic growth -- they can increase lending rates more than they will need to increase rates paid on deposits," Greenspan said.

"Some banks would undoubtedly be hurt by rising rates," Greenspan said. "However, the industry appears to have been sufficiently mindful of interest rate cycles and not to have exposed itself to undue risk."

Greenspan said a series of banking mergers has not harmed the overall competitiveness of U.S. banking and financial markets and has brought more services and products to consumers.

The recent increase in banking merger announcements, which came after consolidation activity had slowed sharply in previous years, "may signal a return to a more rapid pace of bank merger activity," he said.

Greenspan also reiterated the Fed's opposition to raising the $100,000 limit on federal deposit insurance coverage.

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