Alan Greenspan is expected to tell Congress today that the policymaking Federal Open Market Committee remains confident on the growth outlook, vigilant on inflation and ready to continue raising interest rates at a measured pace.
Mr. Greenspan, the Fed chairman, presenting the FOMC's mid-year monetary report to Congress Wednesday morning, is likely to be studiously vague on the question of how far the committee expects to raise its target federal funds rate disappointing the members of the House financial services committee and the large audience of investors outside the committee room.
Stronger recent economic data have quietened market speculation on an imminent pause in the tightening campaign and contributed to a rise in the yield on the 10-year Treasury note from 3.8 percent at the start of June to just above 4.2 percent. Fed policymakers have said they expect to continue raising rates at a measured pace, commonly taken to mean quarter-point increments.
"Greenspan will say that the economy is expanding nicely. He can pretty much use the words from the last FOMC statement that growth is firm and inflation is well contained," said Peter Hooper, chief U.S. economist at Deutsche Bank.
"The market is expecting further rate increases through November. They are probably pleased with that, and there is no need at the moment to try to alter the market's expectations about monetary policy."
How far the FOMC raises rates will depend on the economic data and the behavior of long-term interest rates, which have fallen by about 60 basis points in spite of 225 basis points of tightening since the Fed started raising the federal funds rate a year ago.
While the FOMC remains confident in its upbeat growth forecasts, the low level of long-term rates is likely to encourage policymakers to continue raising the federal funds rate to engineer a tightening in overall financial conditions.
The strong housing market, and concerns about froth in a number of local markets, is likely to mean that the Fed errs on the side of continuing to raise rates. The housing market was the special subject for discussion at the FOMC's two-day meeting in June, people close to the committee say.
Economists expect only minor changes to February's consensus forecast of the FOMC members of growth of 3 3/4 to 4 percent this year and 3 1/2 percent next year, and inflation based on the FOMC's preferred measure of 1 1/2 to 1 3/4 percent this year and next.
Mr. Greenspan, in a letter to Congressman Jim Saxton released this week, said the economy continued to perform well, though the high oil price was expected to be slightly more than a drag this year than next. He said that the still low level of long-term interest rates was providing stimulus to the economy.
Recent inflation readings have been tame and inflation expectations have remained well contained, though policymakers have said that the federal funds rate at 3 1/4 percent remains too low to keep inflation in check over time.
High energy prices, slowing productivity growth and rising unit labor costs mean that policymakers remain focused on inflation risks. With industrial capacity utilization at 80 percent and unemployment at 5 percent, there is fast diminishing slack in the economy to keep downward pressure on inflation.