Fed`s bullish on economy, low interest regime stays

Washington, July 17: Federal Reserve chairman Alan Greenspan has vowed to keep US interest rates low for a long time even as he predicted a hearty economic recovery. He told Congress the Fed officials might cut official borrowing costs below their current 45-year low of 1% if they need to prevent deflation. Greenspan eschewed for now more dramatic actions such as buying long-term US bonds.

Indeed, he said the economy “could very well be embarking on a period of extended growth,” meaning such aggressive measures probably will not be needed. An upbeat economic view in the Fed chief’s semiannual monetary policy testimony sent US Treasuries prices tumbling. The 10-year bond’s yield, which moves in the opposite direction to the price, posted the biggest one-day rise since October 1998. The pullback in bonds put a damper on the recent stocks rally. The Dow Jones industrial average fell 48 points to 9,129. The tech-laced Nasdaq Composite lost 2 points 1,753.
Speaking to the House of Representatives Financial Services Committee, Greenspan said the central bank “stands prepared to maintain a highly accommodative stance of policy for as long as needed to promote satisfactory economic performance.”
“We would seek significant improvement in the performance from what we currently see before (a rate increase) is even on the table,” he said.

It is highly unusual for Greenspan to offer an outlook for interest rates over an extended period of time. He tends to prefer to keep his options open. Many analysts were also struck by the Fed’s forecasts for the US economy. Policy-makers predicted gross domestic product growth of 2.5% to 2.75% in ‘03. Given the slim GDP gains so far this year, the figures imply a sharp rebound in coming months.
“We would seek significant improvement in the performance from what we currently see before (a rate increase) is even on the table,” he said.

It is highly unusual for Greenspan to offer an outlook for interest rates over an extended period of time. He tends to prefer to keep his options open. Many analysts were also struck by the Fed’s forecasts for the US economy. Policy-makers predicted gross domestic product growth of 2.5% to 2.75% in ‘03. Given the slim GDP gains so far this year, the figures imply a sharp rebound in coming months. Bureau Report