Federal Reserve Chairman Alan Greenspan Wednesday all but guaranteed more rate hikes in congressional testimony that highlighted strong economic growth but also growing risks of an overheated housing market.
Several Wall Street analysts described Greenspan’s testimony before the House Financial Services Committee as surprisingly “hawkish,” meaning he sees an economy strong enough to justify continuing the Fed’s policy of steadily increasing short-term interest rates longer than many had expected.
“We must face the reality that more rate hikes are coming,” said David Rosenberg, chief North American economist of Merrill Lynch, in a research note raising his rate forecast. “There was nothing in the Chairman’s sermon even remotely hinting that the Fed is close to being done in its current tightening program.”
The Fed’s policy-making Open Market Committee has raised the overnight federal funds rate by a quarter-percentage point at every meeting since June 2004, pushing up the benchmark to its current 3.25 percent from a 46-year low of 1 percent. After Wednesday’s comments from Greenspan, most analysts and traders are betting the rate will rise to at least 4 percent by year’s end.
“By omission, the Chairman seems to have signaled that the (policy-making Federal Open Market Committee) is not contemplating a pause between now and the next monetary policy report in six months,” said Neal Soss, chief economist for Credit Suisse First Boston, in a note. “There are lots of developments that could sway the committee in the interim, but any near-term pause in monetary adjustment seems not to be on the Fed’s agenda as of the moment.”
Although the Fed has little control over low mortgage rates that are helping propel record sales and price growth in the housing market, Greenspan once again made clear that the red-hot sector is very much on his mind as he prepares for a mandatory retirement next year after an eventful 18 years in office.
In some of his strongest remarks yet about the potential fallout from high housing prices, Greenspan reiterated warnings about the increasing use of what he described as “exotic” mortgages and referred to “speculative fervor” that has driven up prices in some markets.
“This type of expansion in prices historically does not go on very long and indeed, while it’s hard to forecast, and I’m not sure that it’s going to occur, there may be -- there certainly will be in certain local areas -- price declines,” Greenspan said.
It was the most definitive prediction yet from Greenspan that home prices will decline in some areas.
But Greenspan, in delivering his final midyear policy update to Congress, said any such declines probably would have little impact on the broader national economy, in part because banks have spread out their mortgage risk more broadly than during past real estate downturns. Greenspan will present the same testimony Thursday to a Senate committee, which also will have a chance to question him about the economic outlook.
David Seiders, chief economist for the National Association of Home Builders, said Greenspan appears to be hoping that his sustained focus on home prices will help cool the market, perhaps by discouraging some would-be speculators from entering the market.
“I frankly hope it evolves that way,” he said. “We could use less speculation in housing.”
In suggesting that the Fed has no plans to stop raising short-term rates, Greenspan also has indicated he is not worried about the possibility of a so-called inverted yield curve that would occur if short-term interest rates exceed long-term rates. In fact, long-term Treasury and mortgage rates, which have remained stubbornly low throughout the Fed’s rate-hike cycle, have edged up slightly in recent weeks.
But Seiders said he has seen nothing yet to indicate that home prices are cooling, and he said the Fed and other banking regulators are beginning to come under criticism from those who would like to see more aggressive action to prevent a housing bubble from growing any bigger.
“The price numbers we have — I hate to say it — still look awfully exuberant,” he said. While home construction activity has flattened over the past two months, “builders still have very strong incentives to build given where the prices are,” he said.
Ultimately, he predicted, demand will taper off, giving builders a chance to increase supply and take some of the “froth” out of the market.
While some forecasters threw in the towel Wednesday and raised their year-end forecasts for short-term interest rates, a few still expect the economy to show signs of cooling.
Gina Martin, financial economist at Wachovia, said she expects the Fed to raise rates at its next two meetings in August and September and then pause in response to a projected sharp slowdown in growth.