Washington, DC, June 16--Federal Reserve Chairman Alan Greenspan painted a broadly optimistic view of the U.S. economy, marked by accelerating job growth and modest inflation.
"We seem to be on track, but as duffer golfers like to say, 'It's not a gimmie putt,'" Mr. Greenspan said at a Senate Banking committee hearing on his nomination for a fifth term as Fed chairman.
After Mr. Greenspan's testimony and the release of the consumer-price index, which showed prices other than food and energy rising a modest 0.2% in May, financial markets lowered the odds that the Fed will raise rates by 0.5 percentage point later this month. The markets now anticipate a quarter-point increase then, and the same-sized increase in each of the five remaining scheduled Fed meetings this year, which would bring federal funds rate to 2.25% by year-end, up from a 46-year low of 1% today.
Mr. Greenspan didn't comment specifically on the consumer-price report but said that the Fed's "general view is that inflationary pressures are not likely to be a serious concern in the period ahead." That's partly because of slack in the economy, as evidenced by relatively low level of business inventories as compared to sales. But he quickly added that the Fed was regularly searching economic data to see if its view was too sanguine. "If our judgment as to how the economy is going to evolve and how inflation is going to evolve turns out to be mistaken, we will change," the Fed chairman stated.
The Fed's "central focus," when it comes to economic activity, he said, is the cost of labor, which makes up about two-thirds of business costs. A combination of a "slightly quickening pace" of wage increases and a diminished increase in productivity -- workers' output per hour -- have begun to push labor costs upward, Mr. Greenspan said, but "those increases are still modest."
The Senate as a whole is expectedly to overwhelming approve his nomination. Mr. Greenspan's term as a member of the Fed's board of governors expires in 2006. By law, he can't be named to another term on the board, though he can serve until a successor is confirmed by the Senate.
Mr. Greenspan's upbeat presentation is a plus for President Bush, who is arguing that his policies have helped turn around the economy. He did give help to Democrats on one issue, however: He reiterated his support for a requirement that revenue loss from new tax cuts be made up by revenue increases elsewhere in the budget. Such a provision would make it difficult for President Bush, if he were to win a second term, to win congressional approval for making individual tax cuts permanent.
However, under sharp questioning from Democratic Sen. Charles Schumer of New York, Mr. Greenspan wouldn't say whether he would oppose further tax cuts if the rules he favored weren't adopted by Congress.
During two hours of questioning, Mr. Greenspan batted away one economic issue after another. Would the housing market crash? Not likely, he replied, housing prices and sales were likely to moderate instead. Would higher energy prices force the Fed to boost interest rate? Not unless the overall economy were harmed, he said. Was he concerned that foreigners owned such a large percentage of U.S. government debt? Not really, he replied.
"There is no real base of concern ... than a major endeavor to disgorge those holdings could have a destabilizing effect back here," Mr. Greenspan said, because foreign holdings are largely in shorter-term debt and because U.S. financial markets are flexible enough to accommodate big changes in ownership.
Mr. Greenspan did note two areas of concern, however. He said he worries that the federal government's implied guarantee of the debt of mortgage giants Fannie Mae and Freddie Mac could encourage them to boost their holdings to unsafe levels. He also said he worries about the long-term budget deficit, given the growth in Medicare costs and coming retirement of the baby boom generation.
