NEW YORK (CNN) - Alan Greenspan stated the obvious Wednesday: the Federal Reserve will have to hike interest rates at some point to stop inflation from rearing its ugly head.
Economists say it's now definite: the Fed is officially getting the markets ready for rate hikes, but this is certainly no surprise. After all, jobs are growing, people are spending and even manufacturing is turning around as Greenspan noted in his testimony to the Joint Economic Committee of Congress.
What leaps out at me is the extent to which he downplayed inflation fears and played up all the factors that are keeping inflation in check. With the economy and jobs growing faster, Greenspan could easily have indicated a growing sense of concern that if the Fed doesn't act sooner rather than later, inflation will get out of control.
In fact, he was challenged by one congressman to explain why the central bank is not raising rates right now. If the economy is growing at a 5 or 5-1/2 percent rate, isn't there the risk that inflation will get out of hand?
For many bond market investors, the worry seems to be that the Fed could repeat the missteps of 1994, when the central bank's policy-makers delayed raising rates until long after the 1991 recession had ended, but then boosted them so aggressively that they crushed the bond market and almost pushed the economy back into another recession.
Instead of directly addressing these fears, Greenspan emphasized in his testimony that inflation is not yet a problem mainly because labor costs are still low if not falling, adding that the big difference between now and 1994 is "an extraordinary productivity acceleration."
That means that price pressures aren't anywhere near where they would be under normal circumstances, he said.
Because of strong productivity, Greenspan said unit labor costs are still falling – not as fast as last year but still going lower. He added that strong productivity has also boosted profits so that inflation can stay low even as hiring does finally pick up.
In his testimony, the Fed chairman said inflation will not rise immediately because firms will pay higher labor costs out of their fatter profit margins instead of by boosting prices.
He also went out of his way to point out that even with jobs growing, worker anxiety is still running high. He noted that in March of this year – when the economy created more than 300,000 jobs – the average length of time it took an unemployed person to find a job stretched to 20 weeks, much longer than in September of 2000 when the average job search was just 12 weeks.
So what is Greenspan up to?
Some say he's responding to criticism from the International Monetary Fund this week. The IMF said if the Federal Reserve is planning to raise rates at some point, it should warn the markets of that now or risk a dangerous financial market disruption.
And Greenspan's testimony still leaves an escape hatch if, for some reason, hiring doesn't pick up and wage growth stays as anemic as it is now.
Right now it sounds like Alan Greenspan is still hedging his bets because he's not yet certain of when the Fed will start raising rates or how high they will go.
Kathleen Hays anchors CNN Money Morning and The FlipSide, airing Monday to Friday on CNNfn. As part of CNN's Business News team, she also contributes to Lou Dobbs Tonight.
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