WASHINGTON, D.C. (CNN/Money) - The winds of growth have picked up, the tide of inflation is turning higher, and there's no doubt the Federal Reserve is steering the U.S. economy toward higher rates -- that's the message reaffirmed in today's testimony to the Senate Banking Committee by the nation's Monetary Admiral, Alan Greenspan.
The destination is clearer than ever: a "neutral"stance on monetary policy, one where the Fed's key rate neither stimulates the economy nor slows it down. Economists say that neutral rate is above 3 percent and below 5 percent, a long way from the current 1.25 percent.
Greenspan, however, would say only that the current Fed Funds rate is definitely below neutral, and that "when we are at neutral, we will know it."
What the markets wanted to know going into Tuesday's report was if Greenspan would signal a tack toward bigger and faster rate hikes. Or would he signal a readiness to drop anchor for a while to see if gathering storm clouds of economic weakness would pass or turn into a fullblown squall?
On the latter point, no way! Greenspan said signs of economic weakness will prove shortlived. The economy's pace has quickened, the expansion is self-sustaining, jobs are growing and will keep growing. There was nary a trace of worry in his statements.
As for faster rate hikes, Greenspan again would not be pinned down. In fact, at the beginning of the question and answer period, he said the Fed still thinks it's most likely that it will raise rates at a "measured" pace -- the kind of rate hikes that don't put so much ballast in the economy that it sinks back into recession.
The inflation question, however, is getting interesting. Greenspan noted that the Fed's favorite inflation indicator is now rising at a 1.6 percent annual rate, up from 0.8 percent in December. (Still low, but it's the trend that matters.)
He pointed to rising unit labor costs and said they haven't gotten in the way of long-term price stability "for the moment." The Fed can't be sure that the current "benign" inflation environment will persist and that more pressures might be emerging because rates were so low for so long.
Jobs & Economy
|
|
|
|
The Fed head even said if a more "dynamic" pace of rate hikes is needed, the economy can take it. If that isn't a hint the Fed's ready to go from "measured" to "motoring ahead," what is?
But even if Captain Greenspan has the crew standing by to hoist the sails, he's not giving the command yet. So watch labor costs and prices, as he said the Fed will. Those appear to be the points by which policymakersare setting their compasses now. If they head north, full speed ahead on rate hikes could appear on the horizon.
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.
|