Greenspan: Word of caution

Washington, July 18 (Reuters): Federal Reserve chairman Alan Greenspan, in probably his last semi-annual testimony to Congress this week, will paint an upbeat picture of growth but drop no hint the Fed is ready to pause raising interest rates.

Greenspan, due to retire on January 31, 2006, will address the Congress on Wednesday and Thursday. He may also air his views over the country’s rampant housing market and the “conundrum” of low, long-bond yields.

But the performance will be most closely watched for clues of whether the US central bank is weighing an end to its yearlong policy tightening campaign. Economists think Greenspan will do no such thing.

“He will give no indication at all that the Fed is near the end of raising short-term interest rates,” said Lyle Gramley, a former Fed governor now at the Washington-Stanford Research Group. “Quite the contrary. I think he will caution Congress on the need to continue raising interest rates.”

The US central bank has lifted the overnight federal funds’ rate in nine quarter percentage point steps to 3.25 per cent from last June and is forecast by financial markets to keep raising until 4 per cent by the end of this year.

Recent strong economic data, notwithstanding tame reports of inflation, have reinforced speculation the central bank is still months away from even thinking about a pause.

“The FOMC (Federal Open Market Committee) is tightening to get rates back up to neutral before there is any sign of inflation pressures,” said Dean Maki, chief US economist for Barclays Capital in New York and a former Fed officer.

“The fourth quarter is the earliest they could consider a pause. The rhetoric is consistent with at least a few more rate hikes,” Maki said.

Comments from FOMC members has indeed signaled they harbour little doubt that policy remains accommodative and rates need to keep moving higher.