Greenspan - Interest rates won't rise soon

Thursday, April 18, 2002

WASHINGTON -- Federal Reserve Chairman Alan Greenspan said Wednesday the economy's future is looking brighter, and the central bank is in no rush to raise interest rates.

"There can be little doubt that prospects have brightened," Greenspan told Congress' Joint Economic Committee, sounding more upbeat than he had in early March during his last appearance on Capitol Hill.

Greenspan cautioned that risks persist that the fledgling recovery could falter unless solid consumer spending and business investment are robust in the months ahead.

"The strength of the economic expansion that is under way remains to be clarified," he said.

Greenspan said the Fed has the luxury of waiting to see how events unfold because, except for a jump in energy prices, inflation remains well behaved. There will be ample opportunity to adjust policy to fight inflation if necessary later on, he said.

The Fed chairman also let it be known that the federal funds rate, currently at a 40-year low of 1.75 percent, cannot remain at that level indefinitely with an expectation of keeping prices stable.

Analysts read Greenspan's remarks as a clear signal that the central bank is prepared to wait awhile before starting to boost interest rates. And, they say, even after the rate increases begin, they should be gradual quarter-point moves.

"The bottom line is it is going to be later rather than sooner before the Fed starts raising interest rates," said David Wyss, chief economist at Standard & Poor's in New York.

Wyss predicted the Fed would pass up the chance to raise rates at its May 7 and June 25-26 meetings but probably would start a series of quarter-point moves at the Aug. 13 meeting.

Some analysts said the central bank could delay for even longer, as long as inflation remains dormant.

"The Fed took a lot of heat the last time they used interest rate increases to slow the economy, and I think they are going to be very careful not to do anything to derail a recovery that is still on fairly shaky ground," said Neil Wolfson, head of KPMG Investment Consulting Group in New York.

The central bank last carried out a series of rate increases from June 1999 to May 2000, pushing the federal funds rate, the interest that banks charge each other, from 4.75 percent to 6.5 percent because of worries that tight labor markets would spark inflationary pressures.

The Fed reversed course in January 2001 with the start of an aggressive campaign to cut interest rates. The effort did not come in time to avert the country's first recession in a decade, although it was credited with helping make the downturn milder by easing the shocks to the economy after the Sept. 11 terror attacks.

Normally, signals from Greenspan that the Fed was in no hurry to raise interest rates would bolster financial markets. Wednesday, however, investors were more focused on the Fed chief's continued misgivings about the sustainability of the economic rebound and mixed earnings reports. The Dow Jones industrial average lost 80.54 to end the day at 10,220.78.

"The markets are torn. They like the idea that there will be no immediate hike in interest rates. But Greenspan's statement about the uncertain economic future doesn't really support healthy increases in stocks," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis.

Two-stage rocket

Greenspan rejected fears that the current rebound could become a jobless recovery with unemployment remaining stubbornly high as it did in the early years of expansion after the 1990-91 recession.

He said he believed the recovery would unfold like a two-stage rocket, with the first stage supplying the initial liftoff in the first quarter of this year with a big swing in inventory restocking by companies. For the rebound to be sustained, he said, it would have to be followed by a second stage of business and consumer spending.

Various committee members tried to get Greenspan to comment on Thursday's scheduled House vote to make President Bush's $1.35 trillion 10-year tax cut permanent.

Greenspan said at some point over the next decade Congress would have to deal with the looming Social Security costs of the retirement of the baby boom generation. He also said he believed most businesses were operating under the assumption that last year's tax cut, due to end in 2011, would be made permanent, given the political pressures sure to come.

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