Federal Reserve Chairman Alan Greenspan offered yesterday his most optimistic outlook for the economy since he took over leadership of the central bank in 1986. And he gave no indication that the Fed is inclined to begin raising short-term interest rates soon.
Bond prices moved sharply higher and stocks rose as well after Greenspan made his appearance on Capitol Hill.
Greenspan, in his semiannual report to Congress on monetary policy, said "the prospects are good" for a "sustained expansion" of the economy.
At the same time, productivity gains and what the Fed chairman characterized as a "significant level" of underutilized capacity should help keep inflation low.
Greenspan delivered his remarks and the Fed's forecast to members of the House Committee on Financial Services. Today, he is to appear before the Senate Banking Committee.
Greenspan noted that unforeseen circumstances could alter the Fed's outlook and said the central bank is prepared to change its policy stance if the unforeseen arises.
Specifically, the chairman mentioned concerns about a sharp increase in oil or natural gas prices, and about the potential effects of a ballooning federal budget deficit.
But analysts said that for the most part his remarks contained no surprises.
"He lays out a case for the economy that seems consistent with the facts now," said David Reseller, chief economist at Nomura Securities International. "Those who were looking for an immediate change in monetary policy are disappointed. There is nothing in his testimony that says a policy move is imminent. Nor should there be."
Last month, Fed policymakers sent a brief chill through financial markets when they backed off a previous pledge to keep short-term interest rates low for a "considerable" period and substituted language suggesting that they intended to be patient.
Greenspan embraced that thought again yesterday.
"With inflation very low and substantial slack in the economy, the Federal Reserve can be patient in removing its current policy accommodation," he said.
The bond market, which was nervously awaiting Greenspan's testimony, rallied as he made his remarks.
"This is a relief trade, not a news trade," said Louis Crandall, chief economist at R.H. Wrightson & Associates in New York. "There had been a fear that Greenspan was going to surprise the market."
The stock market, which was full of talk yesterday about the proposed hostile takeover of Walt Disney by the Comcast Corp., also reacted positively to Greenspan's comments. The Dow Jones industrial average surged 123 points to close at 10,737; the Nasdaq composite index climbed 14 points to 2,089; and the Standard & Poor's 500 index gained 12 points to 1,157.
Foreign-exchange traders pushed the value of the dollar lower against the euro and other key currencies after Greenspan said it would take some time for a cheaper dollar to have a positive impact on America's huge current account deficit.
In a report that accompanied Greenspan's remarks, the Fed forecast that on an inflation-adjusted basis, the economy could expand this year at a rate of 4.5 percent to 5 percent.
Meanwhile, as measured by the personal consumption expenditure price index - the inflation measure the Fed prefers - prices would rise at a rate of 1 percent to 1.25 percent this year. In its last forecast, which was made in July, the Fed said it expected inflation to be 1 percent to 1.5 percent this year.
Despite the strong growth, the Fed projects that the unemployment rate, now 5.6 percent, will probably fall to between 5.25 percent and 5.5 percent this year.
Greenspan was pressed by House Democrats on the politically charged issue of job growth.
U.S. Rep. Paul Kanjorski, a Pennsylvania Democrat, asked the Fed chairman whether the recent projection by the Bush administration that the economy would generate 2.6 million jobs this year is realistic.
"Is the administration's forecast, the current one, feasible?" Greenspan said in framing the congressman's question. "If productivity growth slows down to a more historic level, it's probably feasible. But we have not as yet seen any evidence that that is the case. In other words, we're still seeing very little evidence of new job hiring."
In response to another question from a member of the committee, Greenspan said the "natural" unemployment rate should be about 4 percent.
Greenspan also cautioned Congress about the perils of the federal budget deficit and urged it to resist efforts to restrict free trade.
"The imbalance in the federal budgetary situation, unless addressed soon, will pose serious longer-term fiscal imbalances," he said