Greenspan: Us Economy

Source
Thursday, June 09, 2005

WASHINGTON — Federal Reserve (search) Chairman Alan Greenspan (search) said Thursday that the U.S. economy was on a "reasonably firm footing" while inflation was under control, a situation that will allow policymakers to raise interest rates at a measured pace.

In his most extensive remarks on the state of the economy since February, Greenspan told the congressional Joint Economic Committee (search) that a recent uptick in economic indicators showed the soft readings of the early spring were not signaling a more serious slowdown in the pace of activity.

Greenspan's generally upbeat assessment of the economy provided support for the view that the Fed, which has raised interest rates eight times over the past year, planned to continue nudging rates higher at a gradual pace.

"Despite some of the risks that I have highlighted, the U.S. economy seems to be on a reasonably firm footing, and underlying inflation remains contained," Greenspan said in prepared testimony.

"Accordingly, the Federal Open Market Committee (search) in its May meeting reaffirmed that it '...believes that policy accommodation can be removed at a pace that is likely to be measured,"' he added.

The Fed chief noted that slower productivity growth was pushing up U.S. labor costs and said it was an "open question" whether the rise would feed into inflation or hit corporate profits.

"Evidence of increased pricing power can be gleaned from the profit margins of nonfinancial businesses, which have continued to press higher even outside the energy sector. Whether that rise in unit costs will feed into the core price level or will be absorbed by a fall in profit margins remains an open question," Greenspan said.

He said most recent data support the view that soft readings on the economy in early spring "were not presaging a more serious slowdown in the pace of (economic) activity."

While Greenspan repeated that he did not think a nationwide housing price bubble was likely, he pointed to signs of "froth" in some local markets where home prices seem to have climbed to unsustainable levels.

Fed policymakers next meet on June 29-30 and it is widely expected that the Fed will raise a key short-term rate, the federal funds rate, by another quarter-point to 3.25 percent at that time.

Many analysts believe that the Fed will keep raising rates by a quarter-point at later meetings this year, but others think the Fed may decide to pause in the rate hikes later in the summer or early fall.

Greenspan, however, gave no hint that the Fed is ready to pause in its rate hike campaign.

He said that the economy has "alternately paused and quickened" this year, fluctuations that he blamed in large part on the rise and fall in energy prices.

Reuters and the Associated Press contributed to this report.