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Greenspan will keep raising rates he says Original Source Link: (May no longer be active)
http://quote.bloomberg.com/apps/news?pid=10000006&sid=aDyjJavYCoH4&refer=homehttp://quote.bloomberg.com/apps/news?pid=10000006&sid=aDyjJavYCoH4&refer=home
Greenspan Says U.S. on `Firm Footing,' Rates May Rise (Update3)
June 9 (Bloomberg) -- Federal Reserve Chairman Alan Greenspan said the economy is on a ``firm footing'' and central bankers may keep raising the U.S. benchmark interest rate at a ``measured'' pace, cooling speculation about a pause in rate increases.
``Most recent data support the view that the soft readings on the economy observed in the early spring were not presaging a more serious slowdown in the pace of activity,'' Greenspan told the Joint Economic Committee of Congress today. ``The U.S. economy seems to be on a reasonably firm footing and underlying inflation remains contained.''
Investors this year pushed 10-year U.S. Treasury note yields lower on expectations that the economy is slowing and that the Fed may stop raising interest rates soon. The drop in yields as the Fed tripled its overnight bank lending to 3 percent since June 2004 is the year's ``biggest surprise,'' Greenspan said.
U.S. Treasury notes fell after the chairman repeated language from previous Fed statements that ``policy accommodation can be removed at a pace that is likely to be measured.'' The benchmark 10-year note fell 3/16 point, pushing the yield up 2 basis points to 3.96 percent at 11:47 a.m. in New York.
``Even though he is seeing pockets of potential inflation going forward, inflation is still well-contained,'' said Tom Spalding, a vice president at Nuveen Investments in Chicago, in an interview. ``That's very consistent with a quarter-point increase in the fed funds rate at the June meeting. And that would likely lead to another 25 basis points in August.''
Rate Increases
The Fed's Open Market Committee has raised the benchmark rate from a four-decade low of 1 percent in eight consecutive quarter-point increases in a year. The committee is scheduled to meet again June 29-30, when 65 of 67 economists polled by Bloomberg News expect another quarter-point increase.
Traders today boosted expectations for the Fed to increase its target rate. The yield on November fed fund futures at the Chicago Board of Trade rose 5 basis points to 3.66 percent, signaling traders see a 64 percent change that the Fed will boost the rate to 3.75 percent by the end of November. Yesterday they saw a 44 percent chance.
A separate Bloomberg monthly survey conducted May 31 through yesterday showed the median forecast for the rate fell to 3.75 percent, compared with a 4 percent prediction last month. The economists expect growth to slow to 3.5 percent this year from 4.4 percent in 2004, based on the median forecast.
``The Fed has been very, very tight during the past year,'' Robert Heller, a former Fed governor, said in an interview after Greenspan's comments were released. ``If they continue with rate hikes, as the chairman seems to be promising, then indeed it will slow down'' the economy.
`Conundrum'
Addressing what Greenspan calls a ``conundrum'' about the disparity in short- and long-term interest rates is emerging as one of the main themes in his final year at the Fed. Greenspan is 79 and his non-renewable term as a governor ends in January.
Policy makers including regional Fed bank Presidents Jack Guynn of Atlanta and Michael Moskow of Chicago have said in recent weeks that the economy remains strong, while investors focused on potential signs of weakening.
Employers added 78,000 jobs to payrolls in May, about 100,000 fewer than economists expected. The Institute for Supply Management's gauge of service industries fell to a two-year low last week.
Richard Fisher, the new president of the Federal Reserve Bank of Dallas, roiled markets when he said June that the Fed was in the ``eighth inning'' of rate increases and suggested that the Fed's increases may end after June's meeting.
Imbalances in Economy
There are still issues that need to be addressed, such as the effect of higher oil prices, Greenspan said.
``Policy makers confront many of the same imbalances and uncertainties that were apparent a year ago,'' such as the current account deficit and higher energy prices, Greenspan said. ``Sharply higher prices of oil imports have diminished oil purchasing power.''
The futures price of oil has risen more than 40 percent in the past 12 months on the New York Mercantile Exchange. The price per barrel climbed to a record $57.27 on April 1 on speculation that rising demand for gasoline may outpace U.S. refinery production and strain global oil supplies. The price was $53.03 at 9:29 a.m. in New York.
``The alternating bouts of rising and falling oil prices have doubtless been a significant contributor to the period of deceleration and acceleration of U.S. economic activity,'' Greenspan said.
Inflation
So far this year, consumer prices are rising at a 4.8 percent annual rate compared with a 4.4 percent rate of increase at the same time last year. Core prices, which exclude food and energy, are rising at a 2.6 percent annual pace, same as this point last year.
Labor costs, which account for two-thirds of the price of goods, for each unit of production were 4.3 percent higher in the first quarter than the same time last year, the biggest gain since 2000's third quarter, the Labor Department said last week.
``Excluding a large but apparently transitory surge in bonuses and the proceeds of stock-option exercises late last year, overall hourly compensation has exhibited few signs of acceleration,'' Greenspan said. ``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 it's unlikely that there is a national bubble in real estate prices. Even so, low long-term rates have been a ``major factor in the recent surge of homebuilding and home turnover, and especially in the steep climb in home prices,'' he said.
Housing
Ten-year yields help determine mortgage rates. Lower borrowing costs, combined with increased hiring in the last 1 1/2 years, fueled demand for houses. That in turn has helped drive economic growth. U.S. home sales will surge past 8 million this year, the fifth-consecutive record, according to a forecast yesterday by the National Association of Realtors.
The purchase of second homes ``suggests that speculative activity may have had a greater role generating the recent price increases than it customarily has had in the past,'' Greenspan said.
President George W. Bush yesterday told interviewer Neil Cavuto on the Fox News Channel that Greenspan has done a ``heck of a good job'' and that it will be hard to find a replacement when the chairman's tenure at the Fed ends next year. The president declined to name possible candidates.
Last Updated: June 9, 2005 11:51 EDT
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