Fed Chairman Alan Greenspan Speaks
“Thus, our baseline outlook for the U.S. economy is one of sustained economic growth and contained inflation pressures. In our view, realizing this outcome will require the Federal Reserve to continue to remove monetary accommodation.”
By Joel L. Naroff
Federal Reserve Chairman Alan Greenspan trudged up to Capitol Hill for his last semi-annual Monetary Policy Report to the Congress. And he was his usual brilliant self. Indeed, his report is basic reading for anyone who wants to understand (if I can use that word given his prose) the making of monetary policy and how to understand economic factors.
Very simply, the Fed Chairman indicated that the economy was in good shape, inflation pressures and risks were worrisome and there would be more rate hikes so as to assure the expansion.
First, there is the general state of the economy. The slowdown in the spring, which was viewed as asoft spot, was indeed only a soft spot. The Fed is optimistic about the economy and Greenspan stated that “(the Fed’s) baseline outlook for the U.S. economy is one of sustained economic growth.”
But as usual, there are risks and he put inflation at the top of the list. Yes, he believes that inflation pressures will be contained. But he ticked off a series of concerns. First and most critically is productivity, which has slowed and will likely continue to do so. As the Chairman put it, “experience suggests that such rapid advances are unlikely to be maintained in an economy that has reached the cutting edge of technology.” With the unemployment rate declining, wage pressures, which have been contained, could rise. Thus, he has to watch out for inflation pressures arising from the labor markets.
Second, energy costs have remained high and the futures markets are forecasting continued high prices. Thus, he has to watch out for energy-driven inflation pressures.
As for growth concerns, they center on interest rates. In particular, he is somewhat leery of the continuation of the very low longer-term rates: “This decline in long-term rates has occurred against the backdrop of generally firm U.S. economic growth, a continued boost to inflation from higher energy prices, and fiscal pressures associated with the fast-approaching retirement of the baby-boom generation. The drop in long-term rates is especially surprising given the increase in the federal funds rate over the same period. Such a pattern is clearly without precedent in our recent experience.”
That raises the housing issue. Housing benefited greatly from low rates and he repeated his warning that there are some markets that will suffer price declines. He is confident that the previous national impacts will not be repeated even if there are some regional problems.
To summarize, let me use the Chairman’s own words: “In conclusion, despite the challenges that I have highlighted and the many I have not, the U.S. economy has remained on a firm footing, and inflation continues to be well-contained. Moreover, the prospects are favorable for a continuation of those trends.” But watch out for rising interest rates.
Joel L. Naroff will speak at the MACB Annual Convention in Boston on Sept. 16. He is president and chief economist of Naroff Economic Advisors, (www.naroffeconomics.com), 29 Ponderosa Drive, Holland, PA 18966. He can be reached at (215) 497-9050.