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Sat, Jun 11, 2005 - Page 12 News List

Greenspan fears `froth' in US housing market

DOLLAR RALLIES Although the US economy is still on solid ground, the Fed chairman expressed concern about overheating in the housing sector and a low savings rate

AFP , WASHINGTON

US Federal Reserve Chairman Alan Greenspan said the US economy is on solid ground for now, but that "froth" in the housing market and an abysmal savings rate could be storing up trouble.

Speaking to the Joint Economic Committee of Congress on Thursday, Greenspan said that evidence of a spring soft patch in the world's biggest economy did not presage "a more serious slowdown."

Overall, the veteran Fed chairman said, "the US economy seems to be on a reasonably firm footing, and underlying inflation remains contained."

His comments to members from both houses of Congress shed little new light on the US central bank's thinking on monetary policy.

He notably steered clear of baseball analogies, after Dallas Fed president Richard Fisher last week threw markets into a whirl by saying the Fed's cycle of raising rates was in the "eighth inning" and thus nearly finished.

The Fed has lifted its base rate by a quarter point in each of the past eight meetings to 3.0 percent now, to ward off inflation fuelled by a surge in oil prices.

Greenspan confined himself to echoing the language of the Fed's policy-making committee at its recent meetings, that US rates are likely to rise at a "measured" pace.

The US dollar rallied on the comments while US stocks also went up on investors' relief that Greenspan had not dropped any bombshells.

But looking further ahead, the Fed chairman said an overheated housing market in parts of the US, comparatively low productivity growth and a "negligible" savings rate are all worrisome.

"Although a `bubble' in home prices for the nation as a whole does not appear likely, there do appear to be, at a minimum, signs of froth in some local markets where home prices seem to have risen to unsustainable levels," the Fed chairman said in his prepared statement to the committee.

The US housing sector has been smashing records for sales of both new and existing properties, stoking fears about the impact on the wider economy if the market should turn down.

But Greenspan said that any regional declines where prices have risen the fastest, such as in California, "likely would not have substantial macroeconomic implications" at the national level.

He also indicated his distress about the ever-widening US budget deficit fueled by massive tax cuts.

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