Greenspan Faces Lawmakers, Timing Uncertain Over Rate Rise

By Agence France-Presse Federal Reserve chairman Alan Greenspan addresses Congress Feb. 11 amid frenzied speculation about when he will raise U.S. interest rates from a 1958 low. Greenspan and fellow policymakers roiled financial markets two weeks ago when they declared they could be "patient" before ending a period of 45-year low interest rates. Traders dissecting the statement said it had brought forward the timing of a rise in the federal funds target rate, slashed over a three-year period by 5.5 percentage points to just 1.0%. In previous statements, traders noted, Greenspan had promised to keep short-term rates down for a "considerable period." Now the question puzzling financial markets is: How long can the Federal Reserve be patient? "Everyone is waiting with bated breath over what he means by 'patient' -- as if he is going to tell us," says Merrill Lynch chief U.S. economist David Rosenberg. Anyone expecting clarification is likely to be disappointed. The powerful Federal Reserve boss is renowned for foggy remarks that deliberately deny interpretation. "I don't think he will define it because they used a term like patience precisely to give themselves more flexibility," says Wells Fargo Banks chief economist Sung Won Sohn. "So how patient they will be is a function of how well the economy and especially jobs do, and what happens with inflation," adds Sohn. "I would be very surprised if he were to define that precisely because they probably cannot themselves." Forecasts are especially difficult in an economic recovery that seems to defy traditional analysis. Most perplexing, analysts say, is the paucity of jobs. From January 2001 until late last summer, companies axed 2.6 million jobs as they withstood shocks from the collapse of the Internet boom to the Sept. 11 attacks, corporate scandals and the Iraq war fog. But even since then, hopes for an employment boom to match an explosion in economic growth have been frustrated. The economy hit a 19-year record growth rate of 8.2% in the third quarter of 2003 before slowing to a still-solid 4.0% expansion in the final quarter. U.S. businesses hired 112,000 extra people in January -- a three-year record but far fewer than expected -- as the unemployment rate dipped to 5.6%, data showed Feb. 6. Greenspan and private economists blamed the jobs drought on corporate jitters and a newfound ability to use technology such as computers to squeeze far more out of existing workers. Inflation, meanwhile, appears tame. But the record deficits being racked up by President George W. Bush's administration have stoked fears of a future rise in bond yields, threatening future price pressures. Analysts expect Greenspan to deliver a generally optimistic report on the economic outlook. Greenspan has already shown confidence in the labor market, saying the productivity boom must eventually taper off, leading companies to open the door to new hires. "Although we expect his overall remarks to be fairly upbeat with respect to solid domestic growth and continued dormant inflation, the tone will likely be tempered by an acknowledgement of the need for economic healing and the dangers of the large and looming budget deficit," Lehman Brothers economists said in a report. Copyright Agence France-Presse, 2004

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