Federal Reserve Chairman Alan Greenspan has given financial markets plenty to chew over this week with extensive comments about the unprecedented persistence of low, long-term interest rates. Investors are braced for more volatility Thursday when the 79-year-old Fed chief appears before a congressional panel to talk about the economy.
In remarks broadcast by satellite to a monetary conference in China late Monday, Greenspan ruminated on what he previously described as a “conundrum” — long-term interest rates that have remained low and even fallen despite the Fed’s yearlong campaign to raise short-term rates.
But in classic fashion for the sometimes enigmatic chairman, Greenspan’s comments were ambiguous enough to support both sides of a debate raging in financial markets over whether the low long-term rates signal trouble ahead for the U.S. economy.
“This was really the first time I have seen him talk about the economy and acknowledge that maybe the recent slowdown is more than just a passing phase,” said Mary Ann Hurley, a bond trader at D.A. Davidson & Co. in Seattle.
She noted that Greenspan for the first time made note of the possibility that long-term rates could move below short-term rates, a condition known as an “inverted” yield curve that generally signals an economic slowdown or recession.
Over the past year, Greenspan and his Fed colleagues have pushed up the overnight federal funds rate, to 3 percent from 1 percent, and they likely will move it up to 3.25 percent after they next meet June 30. At the other end of the scale the yield on the 10-year Treasury bond, which is used to set long-term mortgage rates, has fallen below the key 4 percent level, compared with nearly 4.9 percent a year ago.
Greenspan said he was not certain what an upside-down rate structure would mean this time around. Lapsing into characteristic Fedspeak, he responded to a question from the audience in Beijing by leaving himself plenty of room for error, saying, "I'm reasonably certain we would not automatically assume that it would mean what it meant in the past.”
In his appearance Thursday before Congress’ Joint Economic Committee, Greenspan certainly will be asked to clarify his views. But he is considered unlikely to signal a major shift in the Fed’s policy on interest rates.
The Fed has raised rates a quarter-point at every meeting of policy-makers over the past year and has not given any hint of when it might pause or stop. Dallas Fed President Richard Fisher raised a bit of a storm last week when he said the central bank was in the “eighth inning” of his campaign, but he is relatively new in his post and is not considered a spokesman for his colleagues.
In his prepared remarks Monday, Greenspan said it was “credible” to think that low long-term rates are signaling economic weakness but said that seems unlikely because "periodic signs of buoyancy in some areas of the global economy have not arrested the fall in rates."
The U.S. economy does seem to be slowing, but extremely gradually. The gross domestic product grew at a 4 percent rate in the third quarter of last year, a rate that has fallen to 3.5 percent in the first quarter of this year, according to the latest revisions.
“Three-point-five may not be much to crow about, but it ain’t that bad either,” said Richard Dekaser, chief economist for National City, a Cleveland-based banking company. He noted that most economists believe the economy’s long-term growth rate is between 3 and 3.5 percent.
“To some extent what feels like slow might not be slow, it might just be slower,” he said.
But others believe the persistently low rates on the bond market are signaling a more severe economic slowdown. Under that scenario, last month’s weak job growth might not be an anomaly but a sign that businesses lack confidence to keep hiring.
We think that the economy is slowing,” said Kathleen Bostjancic, a senior economist at Merrill Lynch, which is calling for growth to drop below 3 percent in the second half of the year. “We don’t see a recession, but we do see something where (growth) is below potential for some period of time. The current soft patch is likely to continue.”
Greenspan and others at the Fed appear to feel differently and have said they are more worried about inflation than a potential economic slowdown.
But the many months of mixed economic signals have left investors nervous. On Wednesday stock market enthusiasm faded after the White House lowered its economic forecast for 2005 – to 3.4 percent from 3.5 percent.
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