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Greenspan preaches patience, but not forever FOMC SEES INFLATION TRENDING LOWER IN 2004WASHINGTON (AFX) - The U.S. economy is expanding robustly, but with
inflation still low, the Federal Reserve can remain patient before raising
interest rates, Fed Chairman Alan Greenspan said Wednesday.
"Looking forward, the odds of sustainedrobust growth are good, although, as
always, risks remain," Greenspan said.
While he sees no urgency in raising rates, he warned that low rates "will not be
compatible indefinitely with price stability and sustainable growth."
One of the major risks to a stable economy is the large and growing federal
budget deficit, which could pose problems even in the near term, he said.
The chairman made the comments in his semiannual written testimony on the state
of the economy at the House Financial Services Committee.
"Stunning" increases in productivity have "obviated robust increases in business
payrolls," he said.
He expressed confidence that hiring would soon pick up.
"In all likelihood, employment will begin to grow more quickly before long as
output continues to expand," he said. Once businesses become more confident and
the easy productivity improvements have been tried, "firms will surely once
again add to their payrolls."
With so much of the nation's productive capacity idle, inflation remains muted,
he said.
Eventually, excess capacity will be absorbed and inflationary pressures will
begin to mount, he said.
"The federal funds rate will eventually need to rise toward a more neutral
level," he warned. "However, with inflation very low and substantial slack in
the economy, the Federal Reserve can be patient in removing its current policy
accommodation."
The Federal Open Market Committee's official forecasts were upbeat about growth
and sanguine about inflation.
The FOMC boosted its forecast for 2004 gross domestic product growth to 4.5 to 5
percent from 3.75 to 4.75 percent earlier. It lowered its forecast for the
unemployment rate to about 5.25 to 5.5 percent by the end of the year from 5.5
to 6 percent earlier.
But the FOMC also lowered its central tendency for inflation to 1 to 1.25
percent from 1 to 1.5 percent. Inflation measured 1.4 percent over the four
quarters of 2003.
Despite favorable fundamentals, the Fed said there were considerable
uncertainties about the economic outlook. The Fed said it was concerned about
the willingness of businesses to hire and how strong overseas growth would be.
In the report, the FOMC said with ongoing gains in productivity, "existing
margins of slack resource utilization should recede gradually, and any upward
pressure on prices should remain well contained."
The report said member of the FOMC concluded at their Jan. 28 meeting that a
self-sustaining expansion was more likely, while cautioning at a "surprisingly
weak" December payroll report showed lackluster hiring. "Inflation pressures
showed no sign of increasing and that a bit more disinflation was possible," the
committee said.
Greenspan spent much of his testimony addressing the dangers posed by the twin
deficits: the federal budget gap and the current account deficit.
Greenspan once again urged Congress to tackle the difficult choices on cutting
spending. "The longer we wait before addressing these imbalances, the more
wrenching thefiscal adjustment ultimately will be," he said.
The federal deficit could "constrain investment and other interest-sensitive
spending and thus undermine the private capital formation that is a key element
in our economy's growth prospects."
The current account deficit represents a similar danger.
So far, the decline in the value of the dollar has been gradual. "No material
adverse side effects have been visible in U.S. capital markets," he said. He
cautioned, however, that "foreign investors, both private and official, may
become less willing to absorb ever growing claims."
This story was supplied by CBSMarketWatch. For further information see
www.cbsmarketwatch.com.

Whoosh!

"the Bank of Japan, the finance ministry spent $68 billion in January alone trying to stop the yen rising against the dollar."

- Economist

I'm still trying to work out why we raised interest rates. There is downward pressure on interest rates in the Eurozone (although the ECB are sitting on their thumbs as usual), reading the runes of Greenspan suggest that there is downward pressure in the U.S. -- but we raised them and sent GBPUSD through the roof. Because of house prices?? Not the cure for that, stamp duty sets the limits at 250k and 500k, and lack of planning permission for new starts. Consumer spending? Fuelled by credit cards, where the interest rate bears almost no relationship to MLR.

Are we inhabiting the same planet?

Derek,

I'd be happy to see UK interest rates up at around 7% to cool off the housing market, allowing 1st time buyers into the market and curbing consumer debt. Higher rates would also lead to a bit of inflation which could ultimately prove good for the bottom line of many businesses.

If the Yanks and the Nips are stupid enough to bust their own economies through building massive debt mountains, it'll be their own problem when it falls down on top of them.

Hil,

I'd agree with you if I thought that interest rates were totally responsible for house price inflation -- and I'm not certain. It's a factor, for sure, but many local authorities are taking 18 months and more to approve new planning permission - there is a real old fashioned supply and demand problem too.

I still don't think MLR has a lot to do with consumer debt -- it's disconnected by credit cards which set rates largely unrelated to MLR. Let's face it, if MLR is 4% and a store card is 29% (or even 10%), even a 1% MLR rise has little impact on the already usurous rates.

The problem is easy credit. Wanna try regulating it?

Cheers

D.

Yes, but isn't credit only easy because it's cheap and the finance companies know the risk of a bad debt is slim? Wait until interest rates start pushing up and see how easy credit is then.

mm; i'm with you - 1% usa, 2% euro, and we need 4%. think it shows a lack of ability with our politicians,
oh, and long cable 189.14, stop in 188.80

Beebs,

I think that the lack of ability lies with the mindless herd who have been sucked into the bubble created by those politicians. Bush doesn't give a stuff about interest rates past November 2004. Why November 2004? Because that's when he's looking to start his 2nd term in office.

and /$ crosses rangebound ahead of 1:30 data and the long US weekend. They look like they want to push higher though and I'm staying long both for now.

tks for that hils - dont think bush will have such an easy ride as clinton did,
we have a clinton on here dont we ?
wonder if he knows any monicas ...........

Beebs: I was amazed to read Roger Bootle's comments in the Sunday Torygraph biznews. He said 4% or more was right and the MPC were jolly good chaps, but those Eurozone wallahs better cut their 2% rate sharpish. Eh? Does that mean we're ready to enter the single currency then :))

Sorry to but in with this question but some of you might have some ideas. Some friends of mine are moving to Australia in June and they have about 20-30000 to transfer over there. Does anyone know the best way of doing this? I assume they should get much better than the tourist rate for such an amount?

Thanks.

I've never known any Monicas. Honest, guv.

Been working up a position on Cable since Tuesday. Now long at an average price of 1.8775, stops at 1.8875.

President's day on Monday (such fine people need a day to be celebrated on) so I guess the US leg of the currency markets will be closed. I'm hoping for a little push up to finish over 1.8950 to keep the momentum up today.

Spaceman:
Just an idea if u like - Why dont they open a multicurrency account -and they can keep switching as to what is appropriate and what rates are beneficial.I think Flemings do one and so do gerrards.

rgds
zarif

Bear Stearns strategist saying he doesn't expect a 1:30 spike today. Personally, I think that if some of the players are out of the market for the long weekend it could get choppy on light volume.

Yabadabadooooooooooooooooooooooooo!!!!!!

:o)))

Who listens to strategists, eh :-)

The big boys look like they might be taking their money off the table following the spike, so I've joined them. It'll still be here next week.

Just heard a serious forecast for at $2.09 for year-end. Short-term dip and then back up.... what with the Jap printing presses running red-hot this is all getting to look a tad daft..

BT; I was expecting to take out the big fig (190) today with all the poor figs,
but looks like we'll have to wait till next week.
2.09 eh, I remember when I first started as a forex broker it was 2.83 - showing my age now.