Feb. 10 (Bloomberg) -- Federal Reserve Chairman Alan Greenspan will likely present Congress with an upbeat forecast for U.S. economic growth this year, spurred by low borrowing costs and increased productivity. The central bank chief, in semi-annual testimony to Congress will probably say gradual improvement in labor markets and moderate wage growth are reasons why Fed officials can be ``patient'' about raising interest rates, a term they introduced in their Jan. 28 policy statement, said M.I.T. Sloan School of Management economist Roberto Rigobon.
He'll explain that the Fed is ``going to keep interest rates low until the economy shows evidence of inflation or employment picking up,'' said Rigobon, who studies monetary issues for the National Bureau of Economic Research. While the economy grew at an average 6.1 percent annual rate in the second half of last year, the fastest in almost two decades, job growth has been dismal. In the past half year the economy created just 184,000 jobs. Last month, a fewer-than- forecast 112,000 jobs were added and manufacturing positions declined for the 42nd consecutive month. Some 1 million jobs have been lost since the recession ended in November 2001. The numbers have made employment a major issue in the presidential campaign. ``George W. Bush has been a disaster for jobs,'' Democratic National Committee Chairman Terry McAuliffe said last week. Greenspan will likely say this is an unprecedented economic situation. ``The reason for this is the remarkable acceleration in productivity'' in the U.S., he said on Jan. 13. ``What numbers of business people have found is that even though their orders are increasing measurably, they've not needed to bring on more people in order to produce and supply goods to their customers.'' The Fed has kept its benchmark overnight lending rate at a 45- year low of 1 percent since June.
`Pretty Confident'
Greenspan is scheduled to testify before the House Financial Services Committee at 11 a.m. Washington time tomorrow, and repeat his testimony to the Senate Banking Committee at 10 a.m. on Thursday. While he will avoid political comment in his presentation, during which Greenspan represents the views of the entire Fed, he may suggest the issue will fade before election day. Fed officials have said hiring will accelerate when growth has been strong enough, long enough. ``I am pretty confident we will see some big numbers fairly soon,'' Fed Governor Ben S. Bernanke said Thursday. The testimony will include the Fed's ``central tendency'' forecasts for growth, inflation, and employment. Economists expect U.S. gross domestic product to increase 4.6 percent in 2004, according to economists surveyed by Blue Chip Economic Indicators. It would be the fastest growth in two decades.
Slow to Hire
Still, the same survey shows hiring improving slowly with unemployment averaging 5.6 percent -- the current level -- in the fourth quarter, and the consumer price index rising 1.7 percent this year, down from 2.3 percent in 2003. Representative Barney Frank, a Massachusetts Democrat, said Greenspan must address the pattern of rising productivity leading to lackluster job creation and lower tax revenue at a time when an expanding fiscal deficit may push up long-term interest rates. ``This is the most interesting and most difficult set of macroeconomic questions we have had in a long time -- for him and for the country,'' said Frank, a member of the House Financial Services Committee.
Budget Deficit
Democrats in particular are interested in pulling the Fed chairman into an election-year fight over Bush's $2.4 trillion budget and the consequences of resulting budget deficits -- $521 billion this fiscal year -- for the economy. ``Chairman Greenspan does believe that if we are not acting fiscally responsible, then we could see interest rates start to soar,'' said Representative Dennis Moore, a Kansas Democrat and member of the House Committee in an interview last week. Traders are betting the central bank will raise rates after September, based on interest-rate futures. The Eurodollar contract for September, a gauge of three-month lending rates, closed yesterday at a yield of 1.555 percent. Eurodollar futures have averaged 24 basis points more than the Fed's rate target during the past decade. A basis point is 0.01 percentage point.
Spending Restraint
Greenspan hasn't been shy in commenting on fiscal issues. In a 2001 Capitol Hill appearance he endorsed tax cuts, a move widely credited with giving momentum to Bush's tax-reduction package. Since that time, the Fed chairman has used congressional testimony to criticize deficits and, more generally, a lack of ``discipline'' in the budget process. While Greenspan, like other Fed officials, has called the tax cuts a timely stimulus that spurred the expansion, ``he hasn't convinced this president'' that long-term deficits are an economic problem, said Kevin Hassett, director of economic policy studies at the American Enterprise Institute, a Washington think tank.
The Fed chairman is expected to call again for spending restraint, as the U.S. grapples with an ageing population increasingly dependent on federal entitlement programs. Greenspan ``is worried about structural deficits,'' said Lou Crandall, chief economist at Wrightson ICAP Llc. The Fed chief ``thinks that monetary policy in most cases is sufficient and that fiscal policy is difficult to use deftly.'' //www.bloomberg.com