WASHINGTON, Feb 11 - Federal Reserve Chairman Alan Greenspan will tell Congress on Wednesday that U.S. economic prospects are good but stress the central bank can be patient before upping interest rates from 1958 lows, analysts say. In presenting the Fed's semiannual report on monetary policy to Congress, Greenspan is expected to assure lawmakers that inflation is unlikely to flare up any time soon, given a weak job market and lots of spare productive capacity. "The Fed chief is expected to leave his policy options open by signaling that although rates are likely to remain low for a while, a 1 percent Fed funds rate cannot be sustained indefinitely," Morgan Stanley economists David Greenlaw and Ted Wiesman told clients in a note.
Greenspan appears before the House of Representatives' Financial Services Committee at 11 a.m. EST (1600 GMT) on Wednesday, and makes a second appearance before the Senate Banking Committee at 10 a.m. EST (1500 GMT) on Thursday. Lawmakers will likely take the opportunity to grill the influential central banker on U.S. fiscal policy. The Bush administration has forecast a record $521 billion deficit this year but has vowed to cut that in half by 2009. Democrats say the ballooning deficit is fiscally reckless and want Greenspan to endorse their arguments as they attack the Republicans ahead of presidential elections in November.
'DANCE AROUND THE ISSUES'
"Greenspan has seen this all before and can be expected to dance around the issues in a way that avoids providing either party with ammunition that can be used for political gain," said Morgan Stanley. Jobs are another key election issue and despite a robust economic expansion in the second half of last year, employment growth is still stuck in low gear -- a powerful reason for the Fed to stand pat until a convincing jobs recovery is underway. The U.S. economy created 112,000 new jobs in January, far fewer than expected, government data showed last week. Analysts had expected the economy, which has been showing strength in areas other than job growth, to add 150,000 new jobs. Economists say the United States needs to add 150,000 jobs a month just to keep pace with growth in the labor force and to keep the unemployment rate steady. Since September, only 366,000 jobs have been added, or just over 70,000 a month. "Politically ... how do you justify moving (rates) when there are no job gains?" said David Wyss, chief economist at Standard & Poor's in New York. "And economically, quite frankly, until you see some sign of either inflation or tightness in the labor market ... there's not a lot of reason to move," he said. Fed officials have said tame inflation, and the risk it might slow further, was a key reason they chopped the benchmark overnight interest rate to 1 percent last June. Financial markets, as always, will parse his every word and comb through Fed forecasts on growth, unemployment and inflation for clues on when interest rates might rise. Some economists see an initial rate hike around midyear. Others see the central bank holding fire until after the U.S. presidential election in November, if not into 2005.//