Fed.Chairman Alan Greenspan Calls Economy "Firm" But Still Says Rates May Rise
Thursday, June 09, 2005SUSIE GHARIB: Federal Reserve Chairman Alan Greenspan said today the economy is on reasonably firm footing and stocks on Wall Street rose. In testimony to the congressional joint economic committee, Greenspan gave an upbeat assessment of the economy. The conclusion of most Fed watchers, Greenspan and company will continue raising interest rates to keep inflation in check. Stephanie Woods reports.
STEPHANIE WOODS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Fed Chairman Alan Greenspan gave no indication the Fed is done raising interest rates. He told lawmakers despite the risk of a housing bubble in some local markets and high oil prices, the economy is growing. Lawmakers tried to pin down Greenspan on just when the Fed might be done tightening. But the Fed chairman gave few clues.
ALAN GREENSPAN, FEDERAL RESERVE CHAIRMAN: It`s very difficult to know where that so-called neutral rate is. But we probably will know it when we are there because we will observe a certain degree of balance, which we had not perceived before.
WOODS: Greenspan credits consumer spending and business investment for keeping the economy on firm footing. Remarks last week by the Dallas Fed president that the Fed is in the eighth inning of the tightening cycle had Fed watchers listening closely to Greenspan.
STEVE EAST, CHIEF ECONOMIST, FRIEDMAN, BILLINGS, RAMSEY: What I heard Mr. Greenspan say today, that we are probably not quite that late in the tightening cycle. Greenspan today didn`t sound to me like a Fed chairman who thought that one more rate hike was going to be sufficient.
WOODS: Political economist Tom Gallagher is looking more to the outlook for the economy than what Fed speakers say for guidance. Gallagher predicts the Fed will have the last of its rate hikes in June or August.
TOM GALLAGHER, SR. MANAGING DIRECTOR, ISI: Our view is that the Fed has a hawkish approach to monetary policy, but that that gets trumped by a weakening economy.
WOODS: Lawmakers raised concerns that the Fed helped fuel a real estate bubble by giving Americans little reason to save and every reason to borrow. But Greenspan defends the decision to keep interest rates low.
GREENSPAN: In our judgment, the positive effects of the policy far exceed the negative ones, and we decided at that time it was the appropriate policy to initiate.
WOODS: Risks from a housing bubble and higher oil prices are clearly a concern for the Fed. Greenspan says while the overall inflation rate remains modest, the Fed stands ready to act. Stephanie Woods, NIGHTLY BUSINESS REPORT, Washington.
GHARIB: Joining us now with more analysis, Robert Hormats, vice chairman of Goldman Sachs International. Hi, Bob.
ROBERT HORMATS, VICE CHMN., GOLDMAN SACHS INTERNATIONAL: How are you, Susie?
GHARIB: I`m fine, thank you. So give us your analysis of what you heard from Greenspan today.
HORMATS: Well, it`s pretty much as predicted. He thinks the economy is in reasonably good shape. He believes that inflation is contained. He`s concerned about some froth in the housing market but doesn`t think that that`s going to be difficult for the economy to deal with if the market weakens a bit. And he`s focused on energy and indicated that he thought the rise and fall of the price of energy around a relatively high level has been a problem for the economy. The economy improves when the price of oil goes down and weakens when the price goes up, pretty much what we`d anticipated.
GHARIB: Did you come away though with any new insights or any clarifications about Fed policy based on the testimony today?
HORMATS: Not really. He pretty much said what he said at the New York Economic Club a little while ago. We`ll know a neutral rate when we see it. We`re not there yet. And he left me to conclude that they have a couple more rate increases in them and they`ll look at the numbers and decide when enough is enough.
GHARIB: What about your thoughts on what Greenspan said about long- term rates and the flattening of the yield curve? He doesn`t feel that this is signaling any concerns about the recession, but what are your thoughts on that?
HORMATS: Well, he looks at this as he has mentioned as a conundrum. In the past one would have assumed that with a decline in long-term 10-year bond interest rates, that was the market signaling that we were in for a weaker economy and that would be a signal for the Fed to slow down and perhaps stop raising interest rates. But if you believe that there are other alternatives, which are to say that foreign capital is holding down long-term or 10-year interest rates and you assume that we have a very benign inflationary environment as a result of globalization, then you don`t make the assumption that an inverted yield curve necessarily or even a close to an inverted yield curve necessarily is going to cause the Fed to stop raising interest rates.
GHARIB: Alan Greenspan and Treasury Secretary John Snow are going to be headed to London this weekend and they`ll be meeting with the finance ministers of the other G-7 countries. What do you think is going to be the most important item on the agenda this weekend?
HORMATS: Well, the British are certainly going to push for an aid program for Africa. I don`t think the United States is going to be particularly enthusiastic about that. The other issue, of course, is the exchange rate of the Chinese the RMB. And I don`t think they`re going to push hard on the Chinese. I don`t think they are going to hammer them because they have been shown that that is not very productive. The Chinese don`t respond well to pressure. But it is certainly going to be an issue that they`ll be discussing quietly and the other is Europe. Europe after the no vote in France and in the Netherlands, the Europeans are in a difficult spot. Their economies are growing at a very tepid rate. There is concern about the continued stability of the euro zone and European leaders are going to - financial leaders are going to have to indicate some effort to improve, to reinvigorate their economies, to continue their foreign (ph) process and to reassure people that the euro is going to stay a major functioning, a financial instrument.
GHARIB: Now what does that no vote on the European constitution? What does it break down to meaning and what kind of impact will it have on American investors and on American businesses?
HORMATS: Well, essentially it is a vote among European -- the average European against the European elites and a sign of caution that some Europeans at least don`t want rapid additional progress toward expansion of the European Union, particularly to have Turkey and they don`t want as much deregulation. They`re concerned about jobs and offshoring. They call it delocalization.
GHARIB: But how does this impact American investors?
HORMATS: Well, American investors, the problem would be if the reform process slows down, that`s not good for American investors because the American investor obviously would like to see a more efficient, more dynamic Europe. If this is read as a signal by European leaders that Europeans don`t want further deregulation. They want to be more protective of jobs, they want less reform, that makes Europe a less dynamic place and that`s not good for American business.
GHARIB: All right Bob. Thank you very much for explaining all this. We appreciate it.
HORMATS: Thank you.
GHARIB: We`ve been speaking with Robert Hormats, vice chairman of Goldman Sachs International.
