Posted on: Friday, May 7, 2004
Greenspan says deficit clouds economy
By Mark Skertic
Chicago Tribune
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| Federal Reserve Chairman Alan Greenspan tells the Joint Economic Committee on Capitol Hill that America's economic recovery has good momentum and that low, short-term interest rates will have to rise as some point. When Federal Reserve policy makers gather next week they will be faced with the prospect of raising interest rates — and perhaps a replay from 1994, when such an increase sent financial shock waves worldwide.
Associated Press library photo |
The nation has "lurched from a budget surplus in 2000 to a deficit," Greenspan said in a satellite address to a Federal Reserve banking conference.
The country cannot "disregard all the time-tested criteria of imbalance and economic danger," he said. "The free lunch has still to be invented. The problems must be addressed."
Greenspan has delivered the keynote speech at the Fed conference nearly annually since 1988. This year, he outlined no specific solutions to the problems he addressed, but used the opportunity to highlight themes he has hammered recently.
He began by detailing problems in the economy and noting that a recent congressional projection had the budget deficit at 4.25 percent of U.S. gross domestic product. The trade deficit is also climbing, he said, with one measure pegging it at 5 percent of GDP.
But such forces have not seemed to hurt some segments of the economy. He pointed out that Treasury bills maturing in a decade maintain a low yield, making the cost of borrowing cheap.
"Nor are we experiencing inordinate household financial pressures as a consequence of record high household debt as a percent of income," Greenspan said.
He addressed interest rates only briefly, saying it is likely that a "softening in housing markets would likely be one of many adjustments that would occur" in the aftermath of an increase.
Also yesterday, minutes of the March meeting of Federal Reserve policy-makers was released. At that meeting, some members worried about "the potential for the emergence of financial and economic instability when policy tightening proved necessary in the future," according to the minutes.
The short-term interest rate remained at 1 percent after that meeting and the next held a month later.
Greenspan acknowledged yesterday that in a recent address to Congress he was optimistic about the economy's performance over the next year or two. But he warned yesterday that "the outlook for the latter part of this decade remains opaque."
