Greenspan: Economic signals still mixed

In testimony on Wednesday 21 May Alan Greenspan said the Federal Reserve is ready and able to tackle deflation if necessary in the unlikely event of falling prices, the washington Post reports. The Federal Reserve would not be "out of business" policy wise even if interest rates slid further towards zero, he added.
In testimony on Wednesday Alan Greenspan said the Federal Reserve is ready and able to tackle deflation if necessary in the unlikely event of falling prices. The Federal Reserve would not be "out of business" policy wise even if interest rates slid further towards zero, he added.

Source: Washington Post

Federal Reserve Chairman Alan Greenspan told a congressional panel Wednesday that the Fed is ready and able to do whatever necessary to guard against the remote possibility that a weak economy will trigger a debilitating bout of falling prices.

Greenspan assured the congressional Joint Economic Committee that even with the Fed's key economic policy lever, the federal funds rate, at a 41-year low of 1.25 percent, the central bank has other resources to influence interest rates to jump-start economic growth.

He said that in addition to pushing the funds rate, the interest that banks charge each other on overnight loans, closer to zero, the Fed can simply begin buying longer-term Treasury securities to drive longer-term interest rates lower.

"Should it turn out for reasons that we don't expect, but certainly there is a concern it may happen, that pressures drive the Fed funds rate closer to zero, that does not mean that the Federal Reserve is out of business," Greenspan said.

"We see no credible possibility that we will at any point run out of monetary ammunition to address problems of deflation or anything else that disrupts our economy," Greenspan said.

In his prepared testimony, Greenspan noted that at the present time, "the probability of an unwelcome substantial fall in inflation over the next few quarters, though minor, exceeds that of a pickup in inflation."

That language tracked what Fed policy-makers said after their May 6 meeting when the central bank, in an historic shift, signalled that for the first time in more than a half century, they were more worried about the possibility of deflation - a prolonged period of falling prices - than in inflation. The country's last bout of deflation occurred during the Great Depression of the 1930s.

Many economists believe that the Fed's new worries about the possibility of deflation have increased the odds that the central bank will cut interest rates when policy-makers next meet June 24-25. Analysts believe the debate at that meeting may not be over whether to cut rates but how large of a rate cut to provide, either the normal quarter-point move or a larger half-point cut.

The last Fed rate cut occurred Nov. 6, when the Fed, worried about a developing "soft spot" in the economic recovery, cut rates by a half point. That reduced the target for the federal funds rate, the interest that banks charge on overnight loans, to a 41-year low of 1.25 percent.

Greenspan said that at the present time economic data is sending mixed signals about the strength of the recovery with no strong pattern established in the weeks following the end of the Iraq war.

"The economy continues to be buffeted by strong cross currents," Greenspan said.

"We do not yet have sufficient information on economic activity following the end of hostilities to make a firm judgment about the current underlying strength of the real economy," Greenspan said.

He said that while declines in energy prices immediately after the war were encouraging, with West Texas intermediate crude falling to below $26 per barrel, some of that decline was recently reversed with the price of crude oil rising to near $30 a barrel. That's because of indications of delays in restoring Iraqi crude production and various other geopolitical risks creeping back into market expectations.

He called this a "worrisome trend if continued" but noted that even at $30 per barrel, oil prices are still about $10 below the peak hit in February.

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