Washington, Mar. 3--Interest rates are too low for long-term economic stability and will have to rise at some point, Federal Reserve chairman Alan Greenspan said, without giving an indication when that would be.
Mr. Greenspan also said it would be five to 10 years before anyone can conclude the Fed was right not to prick the stock-market bubble of the 1990s. That was a more restrained assessment of the Fed's strategy than he gave in a speech in San Diego two months ago.
At 1%, the Fed's target for the Federal funds rate charged on overnight loans between banks "is accommodative and at some point it will have to rise back to a more neutral state because it is inconsistent with general long-term stability," Mr. Greenspan said Tuesday in a speech to the Economic Club of New York.
Central bankers always ask themselves first, "Are rates too low?" Mr. Greenspan said, responding to questions following his remarks. "The burden of proof" is on why they should be so low. He didn't define stability but Fed officials believe that rates kept at 1% for too long would eventually fuel inflation.
But Mr. Greenspan added, "This is a very special case that we are dealing with ... clearly, we have kept the federal-funds rate where it is because we have very good reasons." In past remarks, Fed officials have pointed to low inflation, ample unemployment and unused business capacity as reasons for not raising rates.
Mr. Greenspan didn't say, as he did in recent testimony to Congress, that the Fed can be "patient" about raising the funds rate. But that didn't appear to be deliberate; he seldom sends significant new signals on monetary policy in unscripted settings such as Tuesday's.
His remarks in recent weeks have displayed reduced concern with the likelihood of further falls in inflation or outright deflation -- that is, falling prices. He noted in his prepared remarks that import prices have risen by far less than the dollar's fall would ordinarily bring about, in part because European exporters have hedged their exposure to the dollar's decline against the euro.
As those hedges expire, "dollar prices of imports will surely rise." He also said that deflation is probably only a concern when accompanied by falling asset prices, which isn't the situation today.
Mr. Greenspan also said he had "concluded tentatively, and I emphasize the word tentatively," that the Fed was right not to prick the stock bubble in the late 1990s, choosing instead to try to limit the damage when it burst. But he added, "I suspect we will not know that it is the right answer for another five or 10 years, because it's only in retrospect that we will see this." Indeed, it won't be clear if it was the right action until the "next time," and "then it may not be the right answer any more."
Two months ago, Mr. Greenspan said there appeared to be tentative evidence to conclude the Fed's strategy "has been successful." Many reporters and analysts interpreted those remarks as a declaration, possibly premature, of victory in the continuing debate over whether the Fed could have avoided recent economic pain by attacking the stock bubble earlier. Mr. Greenspan's more humble tone Tuesday may have been designed to dispel charges of triumphalism.
Mr. Greenspan also pulled back somewhat from remarks last week that more homeowners would benefit from alternatives to the 30-year fixed-rate mortgage, and that they would have saved a lot of money with adjustable rate mortgages.
"I did not mean to disparage" the 30-year mortgage, he said, but rather to suggest that a small number of households would benefit from alternatives to both the 30-year and currently available adjustable-rate mortgages. He said that when he had to borrow to buy real estate, "I always took a long-term mortgage."
