July 17, 2005

Greenspan, at end of era, to signal more rate rises

By Alister Bull

WASHINGTON (Reuters) - Federal Reserve Chairman Alan
Greenspan, in probably his last semi-annual testimony to
Congress this week, will paint an upbeat picture of growth but
drop no hint the Fed is ready to pause raising interest rates.

Greenspan, due to retire on Jan. 31 2006, will address
Congress on Wednesday and Thursday. He may also air his views
over the country's rampant housing market and the "conundrum"
of low, long-bond yields.

But the performance will be most closely watched for clues
of whether the U.S. central bank is weighing an end to its
yearlong policy tightening campaign.

Economists think Greenspan will do no such thing.

"He will give no indication at all that the Fed is near the
end of raising short-term interest rates," said Lyle Gramley, a
former Fed governor now at the Washington-Stanford Research
Group. "Quite the contrary. I think he will caution Congress on
the need to continue raising interest rates."

The U.S. central bank has lifted the overnight federal
funds' rate in nine quarter percentage point steps to 3.25
percent from last June and is forecast by financial markets to
keep raising until 4.0 percent by the end of this year.

Recent strong economic data, notwithstanding tame reports
of inflation, have reinforced speculation the U.S. central bank
is still months away from even thinking about a pause.

"The FOMC (Federal Open Market Committee) is tightening to
get rates back up to neutral before there is any sign of
inflation pressures," said Dean Maki, chief U.S. economist for
Barclays Capital in New York and a former Fed officer.

"The fourth quarter is the earliest they could consider a
pause. The rhetoric is consistent with at least a few more rate
hikes," Maki said.

Recent comments from FOMC members has indeed signaled they
harbor little doubt that policy remains accommodative and rates
need to keep moving higher, softened somewhat by the corollary
that this judgment will be "data dependent."

Richmond Fed President Jeffrey Lacker said last Monday it
was "still too early to be foreseeing a pause" while San
Francisco Fed chief Janet Yellen and Philadelphia Fed President
Anthony Santamero both separately said it made sense to keep
raising rates toward neutral.

Neutral -- the level at which interest rates neither helps
nor hinders the economy -- is hard to pin down but is generally
assumed to lie between 3.5 and 5.0 percent.

With it already within sight of the bottom end of that
range, recent tame inflation has convinced some investors the
Fed need not rise much more. June's consumer price index was
unchanged and CPI excluding food and energy costs rose just 0.1
percent, so why keep raising rates if this imperils growth?

But the surging stock market and persistently low long-bond
yields signal that financing conditions in the U.S. economy
remain stimulative for businesses.

At the same time, unemployment came down again last month
and now stands at 5.0 percent from around 5.5 percent a year
earlier, while economic slack is steadily shrinking.

Fed data out on Friday showed that capacity utilization hit
80 percent in June, the highest reading since December 2000,
from 79.4 percent in May.

This takes it close to thresholds that some economists fear
create production bottlenecks in the economy that lead to
shortages and hence inflation.

"I don't really see any strong reason at this point to
signal an early end to the tightening process ... he'll
probably just do more of the same," Goldman Sachs chief U.S.
economist Bill Dudley said. "We have them going to 4.5 percent
next year," he added.