Washington, May 21 (Bloomberg) -- Federal Reserve Chairman Alan Greenspan said forecasts for the U.S. economy to pick up in the second half are ``not unreasonable'' and the risk of deflation is remote. The chairman's testimony to Congress suggests central bankers will refrain from lowering interest rates at their late-June meeting. The economy may grow at a 3.8 percent annual rate in the fourth quarter, up from 1.6 percent in the first three months, based on the median forecast in a Bloomberg News survey.
``The consensus expectation for a pickup in economic activity is not unreasonable, though the timing and extent'' are uncertain, Greenspan said. ``Readings on production and employment have been on the weak side, but the economic fundamentals -- including the improved conditions in financial markets and the continued growth in productivity -- augur well for the future.'' While interest rates are low enough to spur consumer and business spending, the ``central question'' remains whether companies have enough confidence to increase spending and resume hiring, he told the Joint Economic Committee. The Federal Open Market Committee voted this month to keep the benchmark overnight bank lending rate at 1.25 percent, the lowest since 1961. ``There is nothing in the text that points to a near-term easing of rates,'' said Joseph LaVorgna, senior U.S. economist at Deutsche Bank Securities Inc. ``He is still remaining cautiously optimistic that the economy is going to get out of its current soft patch.''
Deflation
Greenspan repeated the FOMC's concern after its May 6 meeting that a ``substantial fall in inflation,'' or disinflation, would be ``unwelcome.'' The so-called core rate of the consumer price index rose 1.5 percent in the 12 months ended April, the smallest gain since 1966. Deflation, or a broad decline in prices that is difficult to control, ``is not an imminent danger'' to the U.S., he said. ``The threat, even though minor, is sufficiently large that it does require very close scrutiny and maybe, maybe action on the part of the central bank,'' Greenspan said. He said the Fed has already acted aggressively against some causes of deflation by lowering interest rates a dozen times since early 2001. By not focusing more on the issue, the chairman showed the inflation data in March and April ``have worried Mr. Greenspan rather less than the markets and some of his colleagues,'' said Ian Shepherdson, U.S. economist at High Frequency Economics.
No `Firm Judgment'
The FOMC next meets on June 24 and 25 to discuss interest rates and update the central bank's economic forecast. Fed officials don't yet have enough postwar data ``to make a firm judgment about the current underlying strength of the real economy,'' Greenspan said. ``The Fed may want to wait until after the June FOMC meeting to decide that either the economy is picking up or the rebound is not strong enough, which would cause them to ease further,'' said Gerald Cohen, senior economist at Merrill Lynch & Co. in New York. ``Even if the economy may be rebounding less strongly, the FOMC many remain on hold until August.'' The quick end to the Iraq war likely has given the economy a boost, the chairman said. ``Stock prices rallied, risk spreads narrowed, oil prices dropped sharply, and the dour mood that had gripped consumers started to lift, precursors that historically have led to improved economic activity,'' he said. ``Interest rates remain low, and funds seem to be readily available to creditworthy borrowers.''
Monetary policy ``remains accommodative,'' he said.
The Standard & Poor's 500 Stock Index, which has risen 5 percent so far this year, rose 3.7 points, or 0.4 percent, at 4:21 p.m. in New York. The benchmark Treasury note due in May 2013 rose fell about 3/8 point, pushing its yield up about 4 basis points to 3.39 percent. Jobs and Factories The Fed chairman called recent data on employment and productivity disappointing. The unemployment rate rose to 6 percent last month and industrial production fell 0.5 percent. Factory capacity in use declined to 74.4 percent in April, the lowest since June 1983. Still, those figures ``likely reflect business decisions that, for the most part, were made prior to the start of the war,'' he said, ``and many more weeks of data will be needed to confidently discern the underlying trends in these areas.'' An increasing backlog of orders for capital goods is ``modestly encouraging,'' he said. ``Moreover, recent earnings reports suggest that the profitability of many businesses is on the mend.'' Yet firms still appear hesitant to spend and hire, ``and we need to remain mindful of the possibility that lingering business caution could be an impediment to improved economic performance,'' Greenspan said.
Higher Productivity
There is good news in the 2.3 percent rise in productivity during the first quarter of the year compared with the same period a year ago. ``One reassuring development that has been sustained through this extended period of economic weakness has been the performance of productivity,'' he said. ``The ability of business managers to reduce costs, especially labor costs through investment or restructuring is, of course, one reason that labor markets have been so weak.'' A drop in energy prices since the end of the Iraq war is ``another positive factor in the economic outlook,'' he said. Still, the fact that oil prices have risen this month close to $30 a barrel is a ``worrisome trend if continued,'' he added.
Energy Prices
Crude oil prices, which had fallen to $25 a barrel for the U.S. benchmark West Texas Intermediate crude from a high of more than $33 in March, have risen to $28 a barrel. Greenspan noted that the price of crude oil is still about $10 a barrel below its peak in February, a decline that ``has already shown through to the price of gasoline in May.'' To date, the effects of severe acute respiratory syndrome, or SARS, on the U.S. economy ``have been minimal.'' he said. Airlines have been hurt and some U.S. companies are reporting reduced foreign sales. ``But the effects on other industries have been small,'' Greenspan said. U.S. gross domestic product expanded at a 1.6 percent annual rate in the first three months of 2003 after growth of 1.4 percent in the fourth quarter, the slowest half-year since the second half of 2001. GDP will expand at a 2.4 percent pace this year, according to the median forecast of 59 economists in the Bloomberg survey. ``The economic information received in recent weeks has not, in my judgment, materially altered the outlook,'' Greenspan said. ``Nonetheless, the economy continues to be buffeted by strong cross-currents.'' The chairman urged Congress to increase spending controls.
``In the debate that's been going on on the issue of fiscal policy, it really is a debate between whether or not deficits are increased by spending, or by tax cuts,'' he said. ``What is missing here and was never missing in previous discussions is restraint on spending,'' he said. ``I would like to see this issue addressed far more than it is, and I must say the silence is deafening.''//www.bloomberg.com