Strategy

Greenspan: Prospects Good for Expansion

Dow soars to a 32-month high following the Fed chairman's remarks before Congress.
Stephen TaubFebruary 12, 2004

This year the United States could rack up its strongest growth since 1984, Federal Reserve chairman Alan Greenspan testified Wednesday in prepared remarks before the House Banking and Financial Services Committee.

While this growth would knock down the unemployment rate even further, added Greenspan, according to published reports, low inflation will allow the central bank to remain “patient” before raising interest rates.

“The picture has brightened,” Greenspan told the House committee. “The prospects are good for sustained expansion of the U.S. economy.”

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The “central tendency” forecast of Fed policy makers is that low borrowing costs for corporations and consumers, profit growth resulting from productivity gains, and rising business confidence resulting in strong capital expenditures should help the economy expand as much as 5 percent this year, said Greenspan, according to wire service reports.

He also said he expected companies to continue spending and increase production, helped in part by higher profits and improved balance sheets thanks to their ability to refinance debt at lower interest rates. And although “stunning” productivity gains “have obviated robust increases in business payrolls,” Greenspan predicted, “employment will begin to grow more quickly before long as output continues to expand.”

Greenspan also said “the Federal Reserve can be patient in removing its current policy accommodation,” but that “the evidence indicates clearly that such a policy stance will not be compatible indefinitely with price stability and sustainable growth” and that “the real federal funds rate will eventually need to rise toward a more neutral level.”

Translation: U.S. interest rates aren’t likely to rise above 1 percent anytime soon, but this can’t go on forever.

The Dow soared to a 32-month high following Greenspan’s testimony. Greenspan warned, however, that Congress could short-circuit the recent rally in the financial markets if it doesn’t become more disciplined on spending.