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Greenspan: Economy on 'firm footing'
Fed chairman's remarks indicate no pause in interest rate hikes -- at least for now.
June 9, 2005: 1:51 PM EDT
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NEW YORK (CNN/Money) - Federal Reserve Chairman Alan Greenspan does not see a significant slowdown in the U.S. economy ahead or major risk from a housing bubble, he told lawmakers Thursday.

In remarks to the Joint Economic Committee of Congress, Greenspan said earlier warning signs of slower economic growth "were not presaging a more serious slowdown in the pace of activity."

"Despite some of the risks that I have highlighted, the U.S. economy seems to be on a reasonably firm footing, and underlying inflation remains contained," he said.

His remarks, ending with a reference to the "measured" language the central bank used in its last policy statement regarding rate increases, suggested the Fed will retain its policy of quarter-point interest rate hikes, at least for the foreseeable future.

On Wall Street, stock prices rose while Treasury bond prices fell, pushing the yield on the 10-year note up to 3.97 percent from 3.93 percent Wednesday. Bond prices and yields move in opposite directions.

Long-term Treasury yields have fallen sharply in recent weeks as investors absorbed some sluggish economic reports and remarks from Dallas Fed President Richard Fisher that the Fed was in the "8th inning" of its rate hikes.

Anthony Chan, senior economist with JPMorgan Asset Management, said Greenspan's comments didn't rule out an early end to rate hikes, but also didn't raise any hopes that might happen.

"Even though people thought this was a great opportunity to take the word 'measured' off the table, he didn't do that," said Chan. "It suggested that he was not at this point prepared to endorse the Fisher hypothesis. I think he's trying to make sure the Fed doesn't box itself in."

No "substantial" threat of housing bubble

On whether recent gains in housing prices have produce a "bubble," Greenspan said that while "we certainly cannot rule out home price declines, especially in some local markets, these declines, were they to occur, likely would not have substantial macroeconomic implications."

Questioned by Rep. Loretta Sanchez, a California Democrat who represents Orange County, Greenspan did concede that even a leveling off of housing prices, let alone a decline would cut into consumer spending, because of the fact that so many households have been tapping into equity they have in their homes to support their spending. But he said he thought the economy would be able to withstand that drop in consumer spending.

"It really gets to a question of what I mean by substantial," he said.

He did express alarm about some of the loans that homeowners are using to buy houses at increased prices, such as interest-only loans.

Those loans and "the introduction of other relatively exotic forms of adjustable rate mortgages, are developments of particular concern," he said.

Overall economic strength

The Fed has raised short-term rates eight straight times as the central bank tries to fight off inflation. But investors and economists have been hotly debating whether the Fed should pause -- or maybe even end -- its rate increases after the economy hit a soft patch last spring.

And while the government said last month that first-quarter economic growth was stronger than initially thought, bond investors still seem more concerned about a possible economic slowdown than a pickup in inflation.

Even though it's raised the target for its fed funds rate, an overnight bank lending rate, to 3 percent from 1 percent last summer, longer-term bond yields, which are set by the market, have fallen -- a phenomenon Greenspan has called puzzling.

Greenspan repeated comments he made earlier in the week that expectations of an economic slowdown could be one reason for the long-term rates being so much lower than expected. But he again said that the narrowing gap between long- and short-term rates will not necessarily bring about an economic slowdown by itself.

As he has in the past, he expressed concerns about the growing federal deficit, but he said he's not particularly concerned about the fact that it is foreign central banks that are buying many of the U.S. treasuries needed to fund that deficit. He said he doubted that they would stop buying the notes, and that even if they did, the impact on the U.S. economy and interest rates "would be evident, but not serious."

And Greenspan said that while the U.S. can't depend on overseas investment here indefinitely, the flow of that money into the United States is a recognition of the strength of the U.S. economy going forward.

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