Greenspan says U.S. economy `has regained some traction'

Fed chief tells Congress that oil prices haven't spurred inflation

September 09, 2004|By BLOOMBERG NEWS

WASHINGTON - U.S. economic growth is picking up after hitting a "soft patch" this year and oil prices aren't causing inflation to accelerate, Federal Reserve Chairman Alan Greenspan told a congressional committee yesterday.

But the growth may not compensate for federal deficits that are "troubling" over time, he said.

"The most recent data suggest that, on the whole, the expansion has regained some traction," Greenspan said in prepared testimony to the House Budget Committee. "Despite the rise in oil prices through mid-August, inflation and inflation expectations have eased in recent months."

Greenspan's remarks suggest that the policy-making Federal Open Market Committee will keep raising interest rates at what it calls a "measured" pace, economists said. The Fed is expected to raise its target rate by a quarter-point to 1.75 percent Sept. 21.

Rise expected

"A rate hike is dead ahead," said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi Ltd. in New York. "The Fed can proceed with its measured pace of tightening."

Some investors said Greenspan wasn't as optimistic as they expected. "For guys who were looking for a lot more hawkishness, he didn't give them that," Peter McTeague, co-head of interest-rate strategy at RBS Greenwich Capital Markets in Greenwich, Conn.

The Fed chairman, now in his fifth term, reiterated his call for Congress to make sure there is funding available before creating new programs. Congress operated under so-called "pay-go" rules for 12 years until 2002. The Congressional Budget Office said Tuesday that the deficit would widen to a record $422 billion for the fiscal year ending Sept. 30.

`Surely deteriorate'

While the expanding economy will lead to a smaller deficit in the next few years, "the prospects for the federal budget over the longer term remain troubling," the chairman said. "With the baby boomers starting to retire in a few years, and health spending continuing to soar, our budget position will almost surely deteriorate substantially in coming years if current policies remain in place."

"The only way I can think of which has any practical possibility of working, which has worked in the past, is a balanced pay-go," Greenspan said. "I personally would much prefer to have both lower taxes and lower spending, but of a necessity a balanced budget. Others choose higher taxes and higher spending. I think that would make the level of economic activity less."

Lyle Gramley, a former Fed governor and now an economic adviser to Schwab Soundview Capital Markets in Washington, said there's a chance Congress may return to pay-go rules. Greenspan "genuinely believes that we eventually will go back to some of the restraints that were imposed by earlier budget acts, and pay-go is a very important part of getting the deficit under control," Gramley said in an interview.

Also yesterday, the Fed said in a separate survey of regional economic conditions that the economy grappled with "lackluster" retail sales and "cooling" home sales in late July and August.

While it "continued to expand," the expansion was uneven in the Fed's 12 regions, according to the so-called "beige book" survey, which was taken before the August FOMC meeting and released after Greenspan's testimony yesterday.

"Consumer spending was mixed across districts and across products in late July and August, with the pace of spending slowing on balance relative to the previous survey period," the report said. "Conditions in the manufacturing sector, on the other hand, improved further nationwide."

"This report indicates that the rebound from the sharp slowing of economic activity at the end of the second quarter has been modest and uneven," said Steven A. Wood, president of Insight Economics LLC in Danville, Calif. "Nothing in this report will dissuade" Fed policy-makers from increasing the benchmark interest rate to 1.75 percent from 1.50 percent at their meeting Sept. 21, he said.

Higher oil futures

All regional Fed banks have supported the central bank's rate increases, as seen in the meeting minutes in which the banks have requested increases in the discount rate as well.

Greenspan's comments yesterday about current conditions, while more optimistic than those in the beige book, did include an observation that there still are "innumerable areas" of the economy doing poorly.

Crude prices "no doubt" contributed to the slower growth in recent months, he said. Crude-oil futures prices have fallen since hitting a record $49.40 a barrel in New York trading Aug. 20. Crude oil closed at $42.77 yesterday in New York.

Greenspan said there's still a risk that oil prices may rise again. Increased demand for oil, particularly from the rapidly growing economies of China and India, has "propelled prices of distant futures to levels well above their ranges of recent years," he said.

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