July 15 (Bloomberg) -- Federal Reserve Chairman Alan Greenspan is likely to tell Congress this morning that tax cuts and low interest rates have positioned the U.S. economy for faster growth in the second half. Greenspan ``has to be upbeat on the medium-term prospects for growth,'' said Ian Morris, vice president and chief U.S. economist for HSBC Securities USA Inc. ``But he will highlight that he can and he will cut rates again if he has to, or keep rates low because inflation is not an issue.'' The central bank chief starts his semi-annual testimony today at 10 a.m. before the House Financial Services Committee. Aside from his descriptions of the Fed policy and the state of the economy, he will also update Congress on the central bank's forecasts for inflation, growth and employment for 2003 and 2004.
Greenspan is likely to clarify why the central bank believes the economy can grow at faster rates without igniting higher inflation, an assertion that bond traders are skeptical about. Greenspan must also appease Congress, which appears to be growing less patient with the economy's performance. ``Continued bad news about the nation's unemployment rate makes it important that Mr. Greenspan focus on this important issue,'' said Massachusetts Congressman Barney Frank in a statement released yesterday. ``We will be seeking any ideas he has about how to alleviate the persistent and apparently worsening unemployment situation.''
Unemployment rose to 6.4 percent in June, the highest in more than nine years, and capacity utilization, a measure of plant use, stood at 74.3 percent in May, the lowest since June 1983. Ample slack in the economy is producing some of the lowest readings on inflation since the 1960s. Still, traders figure that low interest rates will eventually create higher inflation.
Higher Interest Rates
Investors greeted the Fed's June decision to cut the benchmark overnight bank lending rate to a 45-year low of 1 percent by sending market interest rates in the opposite direction. The Fed said it expected inflation to remain low ``for the foreseeable future,'' a term that left traders wondering if the central bank was referring to two quarters or two years. The yield on the 10-year Treasury note, instead of falling in reaction to the rate cut, has risen nearly half a percentage point to 3.72 percent, since the June 25 Fed decision. In February, the Fed estimated the economy would expand at a 3.25 to 3.5 percent rate from the fourth quarter of 2002 to the final quarter of this year. Lou Crandall, chief economist at Wrightson ICAP LLC, said the Fed will most likely revise its 2003 estimates down to 2.25 percent to 2.5 percent.
GDP Growth
Gross domestic product appeared to expand at a 2 percent annual rate in the second quarter, the median forecast of Bloomberg's survey of 55 economists, after expanding at 1.4 percent in the first quarter. Even though the Fed is probably projecting an acceleration to 3 percent to 4 percent annualized growth in the second half, such rates are unlikely to generate much inflation, Crandall said. ``Three to four percent growth is merely decent to verging on good'' given the excess capacity in the economy, Crandall said. `` It is not the kind of decisive number that tells you we have generated the kind of momentum to be self-sustaining. The economy remains vulnerable.''
Greenspan will most likely cite improving financial conditions as another source of optimism.
The Standard & Poor's 500-stock index is up 14.1 percent year- to-date, and corporate bond yields for high-quality borrowers average just 1.19 percent more than U.S. Treasury securities of similar maturity, according to Merrill Lynch and Co. Home buyers are still getting mortgages at some of the lowest rates on record even though the average price of a 30-year fixed-rate low rose for the third week to 5.52 percent last week. The New York-based Conference Board's consumer confidence index was little changed at 83.5 in June, compared with 83.6 in May. What's more, for those consumers who have jobs, tax cuts should boost disposable personal incomes by 7.2 percent on annualized basis in the third quarter, according to the consensus estimate of forecasts gathered by Blue Chip Economic Indicators.
``Slightly higher bond yields won't kill the incipient recovery,'' said Richard Berner, chief U.S. economist for Morgan Stanley, in a note to clients yesterday. ``Headwinds holding the economy back are fading, fiscal stimulus is accelerating, and the economy is less sensitive to changes in interest rates than many believe.'' //www.bloomberg.com