A Still-Wary Fed Chief

Greenspan's cautious tone in his Apr. 17 testimony offered more evidence that the Fed will put off an interest rate hike until at least August

The money phrase in Federal Reserve Chairman Alan Greenspan's Apr. 17 testimony before the Joint Economic Committee of Congress suggested that the Federal Open Market Committee can go slowly in hiking interest rates. The Fed chief said that "to be sure, over time, the current accommodative stance is not likely to be consistent with maintaining price stability."

This indeed puts a rate hike off into the future and August is still S&P's best guess. It looks like the Fed could also maintain its balanced stance at the May meeting, though that is not quite as obvious.

But as far as the progress of the economic recovery, Greenspan seemed fairly equivocal. He said while there's "little doubt prospects have brightened," the strength of the recovery is "still uncertain." But, he noted, "prospects for low inflation and inflation expectations in the period ahead mean that the Federal Reserve should have ample opportunity to adjust policy to keep inflation pressure contained once sustained, solid, economic expansion is in view." Inflation pressures remain largely absent, according to the Fed chief, while the recent surge in oil prices present new challenges.

Greenspan's caution is rooted in concerns about a recovery in business spending ahead, once the inventory-led rebound has past, though he says he's hopeful business spending should ultimately rebound. He doesn't see much upside room for consumption, however, given that it never really retrenched with the downturn.

Still, he also very pointedly ruled out a housing market bubble comparable to the one that ravaged the equity market. Greenspan rightly noted that the bubble is really just a collection of "small, local housing markets" rather than a national market -- which is less subject to speculative pressures given substantial transaction costs and relatively low market turnover.

He said he's also concerned that the negative wealth effect from stocks, which hits upper-income households harder, has not "as yet, fully played out and could exert some further damping effect on the overall growth of household spending relative to that of income."

From Standard & Poor's/MMS International

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