Greenspan Says U.S. Can Withstand Higher Rates

By Agence France-Presse U.S. consumers and businesses are financially fit enough to take an interest-rate rise, Federal Reserve Chairman Alan Greenspan said May 6. On Tuesday, Greenspan and fellow policymakers indicated the days of rock-bottom rates -- with the federal funds target rate at a 1958 low of 1% for the past 10 months -- were numbered. Rates could eventually rise at a "measured" pace, they said. The impact of a rate increase should not be too much of a shock, the influential Federal Reserve boss told a Chicago banking conference via satellite, stepping up a campaign to prepare markets for the switch. The sizzling housing market was unlikely to crash, much household debt was secured on fixed interest rates, and businesses had strengthened their balance sheets, Greenspan said. "A softening in housing markets would likely be one of many adjustments that would occur in the wake of an increase in interest rates," the 78-year-old central bank chief predicted. "But a destabilizing contraction in nationwide house prices does not seem the most probable outcome. Indeed, nominal house prices in the aggregate have rarely fallen and certainly not by very much." Businesses, too, seemed to be in a solid position. "There appears, at the moment, to be little concern about corporate financial imbalances," Greenspan said. "Debt-to-equity ratios are well within historical ranges, and the recent prolonged period of low long-term interest rates has enabled corporations to fund short-term liabilities and stretch out bond maturities." On a national scale, globalized financial markets should help to defuse the buildup in the U.S. current account deficit -- the broadest measure of trade -- without a crisis, Greenspan said. "The resolution of our current account deficit and household debt burdens does not strike me as overly worrisome, but that is certainly not the case for our yawning fiscal deficit," he warned. The budget deficit presented a "significant obstacle to long-term stability," he said. Copyright Agence France-Presse, 2004