Greenspan says US economy headed for sustained expansion

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Last updated at: (Beijing Time) Thursday, February 12, 2004

Greenspan says US economy headed for sustained expansion

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US Federal Reserve Chairman Alan Greenspan said Wednesday the US economy is heading for "vigorous expansion" but warned of risks of soaring budget deficit. "The prospects are good for sustained expansion of the US economy," Greenspan said in a twice-yearly report on monetary policy delivered to the House of Representatives Financial Services Committee.

He said last year appeared to have marked "a transition from anextended period of subpar economic performance to one of morevigorous expansion." He attributed the improved conditions to "anotable reduction in geopolitical concerns, strengtheningconfidence in economic prospects, and an improvement in financialconditions."

Looking forward, Greenspan said the household sector'sfinancial condition is stronger, and the business sector has madesubstantial strides in bolstering balance sheets. Narrowing creditrisk spreads and a considerable rally in equity prices havereduced financing costs and increased household wealth, whichshould provide substantial support for spending by businesses andhouseholds.

"With short-term real interest rates close to zero, monetarypolicy remains highly accommodative. And it appears that theimpetus from fiscal policy will stay expansionary, on net, throughthis year," he said.

"These circumstances all should spur the expansion of aggregatedemand in 2004. At the same time, increases in efficiency and asignificant level of underutilized resources should help keep alid on inflation," he added.

The central bank chief said the expansion of employment todate has significantly lagged increases in output. "New hires andrecalls from layoffs, however, are far below what historicalexperience indicates."

The jobless rate of the United States dropped in January to 5.6percent, the lowest level since October 2001. But the creation of112,000 new jobs last month fell far short of the 150,000 jobsexpected by economists and markets.

A total of 2.2 million jobs have been lost since PresidentGeorge W. Bush took office in 2001. The unemployment is posed tobe one of the key issues in this year's general elections.Greenspan predicted that the lagging job market would improve."In all likelihood, employment will begin to grow more quicklybefore long as output continues to expand," he said.But he said the Bush administration should "remain alert torisks that could threaten the sustainability of the expansion."Besides the chronic concern about a sharp spike in oil ornatural gas prices, Greenspan identified a number of other risks.He said the recent move by the Fed to keep interest rates at a 45-year low was "appropriate to foster sustainable expansion ofeconomic activity," but cautioned that "the evidence indicatesclearly that such a policy stance will not be compatibleindefinitely with price stability and sustainable growth.""The real federal funds rate will eventually need to risetoward a more neutral level," he said. "However, with inflationvery low and substantial slack in the economy, the Federal Reservecan be patient in removing its current policy accommodation."Greenspan warned that the soaring federal deficit, which hit arecord of 521 billion dollars in the current fiscal year, "willpose serious longer-term fiscal difficulties" unless the Bushadministration addresses the issue soon.

In his budget proposal sent to Congress early this month, Bushsaid his administration plans to slash the budget deficit by halfwithin five years.

But Greenspan suggested no effective action has been taken onthe deficit problem, saying it could cause difficulties in therelatively near term as well as pose long-term challenges."Should investors become significantly more doubtful that theCongress will take the necessary fiscal measures, an appreciablebackup in long-term interest rates is possible, as prospects foroutsized federal demands on national saving become more apparent,"he said.

Addressing the federal budget deficit is even more importantin view of the widening US current account deficit, Greenspan said."To date, US current account -- the US current account deficithas been financed with little difficulty. Nonetheless, given thealready substantial accumulation of dollar-denominated debt,foreign investors, both private and official, may become lesswilling to absorb ever-growing claims on US residents," he said.

Source: Xinhua

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