Greenspan says economy has regained ‘traction’

Wednesday, Sept. 8, 2004 | 10:45 a.m.

BLOOMBERG NEWS

NEW YORK -- U.S. economic growth is picking up after hitting a "soft patch" earlier this year and oil prices aren't causing inflation to accelerate, Federal Reserve Chairman Alan Greenspan said today. Growth may not compensate for federal deficits that are "troubling" over time, he said.

"The most recent data suggest that on the whole, the expansion has regained some traction," Greenspan said in prepared testimony to the House Budget Committee. "Despite the rise in oil prices through mid-August, inflation and inflation expectations have eased in recent months."

Greenspan's remarks suggest the Fed's policy-making Open Market Committee is likely to stick to its plan for raising interest rates at what the FOMC calls a "measured" pace, economists said. The Fed is expected to raise its target interest rate by a quarter-point to 1.75 percent on Sept. 21, based on the median forecast in a Bloomberg News survey.

"A rate hike is dead-ahead," said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi Ltd. in New York. "The Fed can proceed with its measured pace of tightening."

The 78-year-old Fed chairman, now in his fifth term, again criticized the federal budget deficit, which the Congressional Budget Office said Tuesday would widen to a record $422 billion for the fiscal year ending Sept. 30.

While the expanding economy will lead to a smaller deficit in the next few years, "the prospects for the federal budget over the longer term remain troubling," the chairman said. "With the baby boomers starting to retire in a few years, and health spending continuing to soar, our budget position will almost surely deteriorate substantially in coming years if current policies remain in place."

Crude prices, which Greenspan said "no doubt" had contributed to slower growth, have fallen since hitting a record $49.40 a barrel in New York trading on Aug. 20. Crude oil traded at $43.27 this morning.

Greenspan said there's still a risk oil prices may rise again. Increased demand for oil, particularly from the rapidly growing economies of China and India, has "propelled prices of distant futures to levels well above their ranges of recent years," he said.

The Fed's overnight bank lending rate, the benchmark for interest rates throughout the U.S. economy, stands at 1.5 percent. Federal funds futures contracts for October delivery trade at 1.74 percent, showing traders expect the U.S. central bank will raise rates again this month.

The higher oil prices helped trim consumer spending, slowing growth and hiring. "Most macroeconomic models treat an increase in oil prices as a tax on U.S. residents that saps the purchasing power of households and raises costs for businesses," Greenspan said. "Economists disagree about the size of the effects."

Housing starts "bounced back" in July and business spending "remains on a solid upward trend," Greenspan said. Consumer spending was higher last month, "although early readings on retail sales in August have been mixed."