- The Washington Times - Wednesday, July 27, 2005

Since becoming chairman of the Federal Reserve Board in 1987, Alan Greenspan has traveled to Capitol Hill 70 times or so to testify before the House and the Senate banking committees in conjunction with the Fed’s semi-annual Monetary Policy Report to the Congress. Under the assumption that he retires at the end of his Fed term early next year, Mr. Greenspan last week delivered what is likely to be his final report. It is worth reviewing his observations.

Mr. Greenspan reported that the Fed’s baseline outlook for the United States “is one of sustained economic growth and contained inflationary pressures.” To achieve this outcome, Mr. Greenspan made clear that the Fed believes it must “continue to remove monetary accommodation.” That’s “Fedspeak” for continuing to raise short-term interest rates — in particular, the overnight federal-funds rate, which the Fed has increased from 1 percent to 3.25 percent since early last summer.

He noted that the U.S. economy has benefited from a “remarkable acceleration” in productivity over the past decade, during which output per hour has increased by nearly a third, rising at an annual average of more than 4 percent during the last three years alone. He cautioned, however, that “such rapid advances are unlikely to be maintained in an economy that has reached the cutting edge of technology.”

Observing that the current yield on 10-year Treasury notes is about a half-percentage point below its level before the Fed began raising short-term rates last year, Mr. Greenspan described such a pattern as “clearly without precedent in our recent experience.” He attributed the development in part to global market forces in which worldwide savings levels have exceeded business investment levels.

The persistence of low long-term interest rates has contributed to soaring housing prices. As a result, high levels of existing-home sales have been “the major contributor to the home-equity extraction that arguably has financed a noticeable share of personal-consumption expenditures and home-modernization outlays.” In this environment of relatively rock-bottom mortgage rates, Mr. Greenspan expressed “particular concern” over the “increase in the prevalence of interest-only loans and the introduction of more-exotic forms of adjustable-rate mortgages,” which could “leave some mortgagors vulnerable to adverse events.”

As always, Mr. Greenspan emphatically cautioned against rising protectionist sentiments. He strongly supported the Central America Free Trade Agreement and he opposed “a significant punitive tariff” on Chinese imports.

Explaining that the United States “can’t count indefinitely [on being] able to borrow at the rate we are borrowing from abroad,” he asserted that “our [domestic] savings rate is inadequate and we must address that over the long run.”

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