WASHINGTON: US Federal Reserve chairman Alan Greenspan has vowed to keep interest rates low for a long time even as he predicted a hearty economic recovery.
He told Congress on Tuesday that the Fed might even cut official borrowing costs below their current 45-year low of 1% if necessary to prevent deflation.
Greenspan eschewed for now more dramatic actions such as buying long-term US bonds.
Indeed, he said the US economy “could very well be embarking on a period of extended growth,” meaning such aggressive measures probably would not be needed.
In his semi-annual monetary policy testimony to the US House of Representatives Financial Services Committee, Greenspan said the central bank “stands prepared to maintain a highly accommodative stance of policy for as long as needed to promote satisfactory economic performance.”
“We would seek significant improvement in the performance from what we currently see before (a rate increase) is even on the table,” he said.
It is highly unusual for Greenspan to offer an outlook for interest rates over an extended period of time. He tends to prefer to keep his options open.
Many analysts were also struck by the Fed’s forecasts for the US economy. Policy-makers predicted gross domestic product (GDP) growth of 2.5% to 2.75% in 2003. Given the slim GDP gains so far this year, the figures imply a sharp rebound in the coming months.
“The Fed forecast for the second half has to be close to 4%,” said Roger Kubarych, economic adviser to Hypo-Vereins Bank. Many private economists have issued more cautious forecasts.
GDP rose at an annual rate of 1.4% in the first three months of this year. The government has not yet tallied second-quarter GDP but experts think the growth rate could mirror the first quarter.
The Fed pegged GDP growth in 2004 at 3.75% to 4.75%.
Greenspan did warn in his testimony of some hazards the US economy might face, including spill-over from economic woes in Japan and Europe. He also noted that the mood in corporate boardrooms was one of wariness, so much so that low rates had failed to entice managers to commit to new investments.
For the overall economy, however, he said rising stock prices, a spree of home refinancings and steps by corporations to bolster their balance sheets portend better times ahead.
“We believe that we’re at a turning point, and our best judgment is that things will be improving.”
The Fed chief weighed in on the politically charged issue of President George W. Bush’s US$350bil tax-cut package. He cited the cuts as one factor that would help the recovery.
But he warned once again that lawmakers and the administration must tackle large and growing budget deficits. The White House has predicted the federal budget deficit would balloon to a record US$455bil this year. – Reuters