Greenspan cautiously upbeat

Federal Reserve Chairman Alan Greenspan said on Wednesday the US economy had turned the corner to vigorous growth but the recovery was dependent on controlling the soaring budget deficit.

Greenspan cautions against burgeoning government deficits

“Last year appears to have marked a transition from an extended period of subpar economic performance to one of more vigorous expansion,” Greenspan said in testimony prepared for delivery to the House of Representatives Financial Services Committee.


“Looking forward, the odds of sustained robust growth are good, although as always, risks remain,” he said.


The Fed chief warned of both potential long-term and short-term risks from failing to get huge government deficits under control.


He also said “chronic concern” about a possible spike in energy prices was another economic danger, and that for Fed policy-makers, a continuing worry was that their policy could become “improperly calibrated” to economic developments.




Greenspan said record federal budget deficits could create problems “in the relatively near term” unless a convincing plan for ratcheting them down was put in place.


“Looking forward, the odds of sustained robust growth are good, although as always, risks remain”

Alan Greenspan,
Chairman, US Federal Reserve

“Should investors become significantly more doubtful that the Congress will take the necessary fiscal measures, an appreciable backup in long-term interest rates is possible,” he said.


Greenspan said inflation appeared to be “in a range consistent with price stability,” which he called notable in view of the dollar’s decline against other currencies.


The Fed chief said foreign companies so far have been willing to absorb the hit to their profits from a falling dollar by hedging on currency markets.




But he cautioned: “Although hedging may delay the adjustment, it cannot eliminate the consequences of exchange rate change.”


Though the Bush administration claims it has a plan for cutting this fiscal year’s projected $521 billion deficit in half by 2009, Greenspan suggested no one yet has presented a convincing roadmap for lowering deficits.


“Although some stirrings in recent weeks in the Congress and elsewhere have been directed at actions that would lower forthcoming deficits, to date no effective constituency has offered programmes to balance the budget,” he said.

Source: Reuters