Federal Reserve Chairman Alan Greenspan insisted Wednesday that nothing is “off the table” as central bankers consider how to prevent the remote but potentially devastating possibility of widespread falling prices, or deflation. As he concluded two days of congressional testimony on the economic outlook, Greenspan tried to undo damage done to bond markets by earlier comments that seemed to minimize the likelihood the Fed would use so-called unconventional methods to fight deflation.
Greenspan, appearing before the Senate Banking Committee, also strongly reiterated his concern about the rising federal budget deficit, which will hit a record $455 billion this year and $475 billion next year, according to projections issued this week by the Bush administration. “There is no question that if you run substantial and excessive deficits over time you are draining savings from the private sector,” Greenspan said. “There is no question that we need to come to grips with this deficit question.”
Greenspan’s comments met a more polite reception in the Senate than his appearance Tuesday before a House panel, where he faced tough questioning from members impatient to see a recovery that always seems to be just around the corner.
Greenspan repeated that he sees “tentative signs” of economic recovery but that rising oil prices and weakness in Europe pose risks to the outlook.
In speaking to the Senate, Greenspan emphasized that the central bank was concerned over the potential for deflation.
“If it occurs, it is a very major event, and even though its probability is very small, the size of the problem should it occur is sufficiently large to have engaged our attention,” Greenspan said.
He repeated that the Fed stands ready to keep interest rates low “as long as needed” to ensure a strong economy and will lower overnight lending rates further if necessary, even though they stand at a 45-year low of 1 percent.
Greenspan’s sparked a bond selloff Tuesday and early Wednesday with his focus on short-term rates, and his comment that unconventional measures, such as buying Treasury bonds to push longer-term rates down, would likely not be needed to ward off deflation. Early Wednesday the yield on the 10-year Treasury bond, which moves inversely to its price, rose to over 4 percent for the first time since March 21. In later trading the bond was yielding 3.99 percent. The rate, which influences a wide range of business and consumer loans, including fixed-rate mortgages, fell as low as 3.09 percent in mid-June.
Referring to his earlier testimony, Greenspan told the Senate panel there was “a general judgment that in a sense we took off the table ... the notion that we might use so-called nontraditional means. I wasn’t aware I took anything off the table at any time.”
Stock prices also fell modestly for a second straight session Wednesday.
In his appearance Tuesday, several House members stressed their dissatisfaction with rising unemployment and the loss of manufacturing jobs in their home districts.
“Where is the momentum in this economy?” asked U.S. Rep. Joseph Crowley, a Democrat from the New York City borough of Queens. “For the past few sessions here you have predicted job growth and wealth creation, and all we have seen, at least in my city, is more job loss and the loss of wealth.”
While Greenspan said he agreed with the majority of economists who predict economic improvement in the second half of 2003, he was able to point only to very early signs of potential strength, such as a modest increase in new orders for capital goods. Meanwhile the economy has lost jobs for five straight months and the unemployment rate rose last month to 6.4 percent, its highest level in nine years.
“I didn’t see a lot of testimony suggesting that there really has been a big improvement in the economy,” said John Silvia, chief economist for Wachovia Securities. “A lot of the financial variables seem to have improved, but (Greenspan) did not point to a lot on the real side of the economy that has improved. We’re still in the anticipatory phase of the recovery.”
U.S. Rep. Bernie Sanders, an Independent from Vermont, railed against Greenspan for ignoring what he described as fundamental economic problems eating away at the middle class.
“I have long been concerned that you are way out of touch with the needs of the middle class and working families of our country, that you see your major function in your position as the need to represent the wealthy and large corporations,” Sanders said.
Greenspan found himself the target of tough questions from more conservative members of the House panel as well. Rep. Michael Castle, R-Del., said he was “increasingly concerned” that highly skilled technology jobs are following manufacturing jobs overseas, and he wondered where the next generation of job growth is going to come from.
“The answer to the question is, it will happen,” Greenspan said. “It’s a very difficult question to answer because we cannot forecast technology effectively. But what we do know is that if we have a sufficiently flexible labor market and a capital goods market which is functioning appropriately, that jobs will be created.”
With the 2004 presidential campaign already under way, and job market improvement apparently still somewhere on the horizon, the questions will only get tougher for the 77-year-old Fed chief.
“Greenspan is not as bulletproof as he was before the beginning of the recession,” said Vince Boberski, senior economist at RBC Dain Rauscher. “There is a feeling out there that the Fed was too aggressive in hiking rates before the bursting of the bubble. And he hasn’t done exactly a stellar job in getting the economy moving again.”
He and other analysts said Greenspan will continue to face criticism until he can point to real evidence of economic improvement.
“Realistically, the jury is still out,” said Joseph Abate, senior economist at Lehman Bros. “In particular the labor market is continuing to languish here. (Greenspan) is seeing improvement in business confidence, not improvement in capital spending or durable goods. Really it’s a lot of conviction but not a lot of hard evidence.”
Abate said that rising long-term interest rates could hamper growth in the near term, bringing an end to the latest wave of mortgage refinancing and weakening the housing market, which has been one of the few bright spots in the economy.
But Greenspan said central bankers fully anticipated that long-term rates would rise when policy-makers chose to cut short-term rates by only a quarter-percentage point last month, rather than the half-point that many on Wall Street had expected.
“We clearly expected that the markets would adjust,” Greenspan said in a response to a question.
Greenspan agreed with panelists who raised questions about the deficit, reiterating his belief that Congress should pay for any tax cuts by reducing spending outlays. Unless deficits are brought under control, higher long-term interest rates are inevitable, particularly as the retirement of the baby boom generation approaches in several years, Greenspan said.
“It’s something we should keep in mind and not keep leaving for another day, because it will come up and get us,” he said.
The Associated Press and Reuters contributed to this report.