Speaking in what might be his last appearance before Congress yesterday, Federal Reserve Chairman Alan Greenspan expressed confidence in the nation's economy and said additional hikes in interest rates are necessary to sustain this growth.
"Our baseline outlook is one of sustained, economic growth and continued inflation pressures," Greenspan told the House Financial Service Committee. Thus, Greenspan implied, upcoming interest rate hikes will most likely be gradual.
The "significant uncertainties" that remain, Greenspan warned, include high energy prices, labor costs and the impact of long-term interest rates on housing.
Richard DeKaser, chief economist at National City, told Reuters that the Fed's comments "show a remarkable amount of confidence in the economy's prospects" and imply that "the expansion is nowhere near its final stages."
But the decline of long-term bond yields, which have refused to budge despite rising official interest rates, poses a risk to the outlook, a situation Greenspan called "without precedent." The decline in bond yields is due partially to a glut in worldwide savings, which has likely been precipitated by insufficient global investment, he added.
Another factor, the Federal Reserve Chairman continued, is a perception within the financial markets that the economy is flattening and risk is becoming mitigated. He warned investors not to become complacent, the Reuters report indicated.
"History cautions that long periods of relative stability often engender unrealistic expectations of its permanence and, at times, may lead to financial excess and economic stress," Greenspan said.
Greenspan's appearance before lawmakers, which was scheduled to continue today, is expected to be the last for the 79-year-old chairman, who is in his final term.
The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.