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Fri, Feb 18, 2005 - Page 12 News List

Fed chairman upbeat on US outlook

STILL GROWING Alan Greenspan forecast expansion for this year to reach up to 4 percent, but expressed puzzlement over the recent behavior of the bond market


Federal Reserve Chairman Alan Greenspan said on Wednesday the US economy is growing at a "reasonably good pace," with inflation in check, but was at a loss to explain why the bond market has been pushing rates lower.

The central bank chief predicted growth this year of up to 4.0 percent this year, with inflation below 1.75 percent and the unemployment level falling.

Greenspan also said he was puzzled by the behavior of the bond market, where interest rates have turned lower even as the US central bank has been raising rates.

He called the phenomenon "a conundrum" that will take time to understand.

In his semi-annual economic report to Congress, Greenspan offered an upbeat assessment of the state of the US economy, saying, "The evidence broadly supports the view that economic fundamentals have steadied."

Greenspan said in prepared remarks to the Senate Banking Committee that the so-called "soft patch" in the economy discussed in recent months "proved to be short-lived."

The Fed chief "painted a generally upbeat picture of the economy," said Joel Naroff at Naroff Economic Advisors: "You cannot be a whole lot more positive than that. From this Fed chairman, those words almost reach the level of exuberance."

Greenspan said that in the seven months since his last report to Congress, "the US economic expansion has firmed, overall inflation has subsided and core inflation has remained low."

The Fed chief gave no clear indication about future interest rate directions after six consecutive quarter-point hikes in the federal funds rate. But he said the base rate, now at 2.5 percent, "remains fairly low" by most measures, which may suggest the pace of gradual rate increases will continue.

The Fed's economic outlook suggested little if any deceleration in the world's largest economy: it projected growth of between 3.75 percent and 4.0 percent for this year, with core inflation holding at between 1.5 percent and 1.75 percent. It forecast a slight drop in the unemployment rate to around 5.25 percent by the fourth quarter from the current level of 5.4 percent.

For next year, the central bank projected growth around 3.5 percent with no significant increase in inflation or unemployment.

"All told, the economy seems to have entered 2005 expanding at a reasonably good pace, with inflation and inflation expectations well anchored," he said.

As for the bond market, Greenspan said he could not explain why mortgage and bond rates have been declining at a time when the Fed has raised its rates by 1.5 percentage points.

The notion that financial markets are downgrading the economic outlook "does not mesh" with the behavior of the stock market and other factors.

He said there are many possible explanations for this contradiction in rates, including increased cross-border capital flows and lower inflation expectations, but that it was hard to explain the phenomenon, which has occurred in the US and other bond markets.

"For the moment, the broadly unanticipated behavior of world bond markets remains a conundrum," Greenspan said.

"Bond price movements may be a short-term aberration, but it will be some time before we are better able to judge the forces underlying recent experience."

"It does appear that Mr Greenspan thinks long term rates should be higher than they currently are. And that is a warning to bond investors," Naroff said.

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