U.S. lawmakers get a chance on Tuesday to grill Alan Greenspan on the significance of a June slowdown, but economists expect the Federal Reserve chief to pin it on a summer lull and stress that all's well with the economy. Greenspan will deliver the first leg of his two-day semiannual monetary policy testimony to the Senate Banking Committee at 2:30 p.m. EDT/1830 GMT, where he is expected to say the recovery is solid and that gradual interest-rate hikes will keep the expansion healthy and lasting. In fact, the U.S. central bank already has begun dismantling the exceptionally stimulative policy it initiated in 2001 -- a policy that took its official federal funds rate down in 13 stages to a 1958 low of 1 percent by June 2003. At its last meeting on June 29-30, the policy-setting Federal Open Market Committee raised rates for the first time in four years, by a quarter percentage point to 1 1/4 percent, in what was seen as the first of several "measured" hikes. David Rosenberg, chief North American economist for Merrill Lynch in New York, said he expects Greenspan to "communicate that overall he remains optimistic on the outlook for economic growth, sanguine about the underlying inflation picture and patient ... with regard to raising short-term interest rates."
ELECTION-YEAR DUELING
Politics will likely loom large at Tuesday's hearing and again on Wednesday morning before the U.S. House of Representatives Financial Services panel. With the November presidential election campaign in full swing, Democrats and Republicans will try and draw Greenspan into the debate over whether the recovery is too slow to rebuild the labor market or is responding nicely to Bush administration tax cuts. The economy clearly lost momentum in June -- retail sales fell, industrial production slipped and job creation came in below forecasts -- but there were early signs of improvement in July and policymakers are confident the elements of lasting expansion are intact.
"If you've got a growing, self-sustaining economy, policy doesn't need to be as accommodative as it was," the president of the Boston Fed, Cathy Minehan, told a Rhode Island audience on Monday. However, Minehan, who is a voting member of the FOMC, also said there was enough spare capacity to avert inflation pressures from higher wages or scarcity of manufacturing space and machinery. Economists said they expect Greenspan also will underscore the Fed's view that some of the recent upward pressure on prices is due to temporary factors. He will present lawmakers with the Fed's updated forecasts for inflation, economic growth and unemployment. Merrill's Rosenberg said he expects the Fed to lower its "central tendency" forecast for real economic growth this year from a range of 4.5 percent to 5 percent offered in February. He said the Fed may also raise its expectation for fourth-quarter unemployment after forecasting in February that the rate will be in the 5.25 percent to 5.5 percent range. And given price rises, Rosenberg said he sees the central bank will bump up its inflation outlook. Greenspan may counter lawmakers' efforts to quiz him on big budget deficits -- a hot issue in the election campaign -- by repeating his long-held conviction that Congress needs to impose discipline on government spending. The Fed chief has emphasized that while he sees deficits as dangerous, spending curbs, not tax increases, are the wisest way to fix them.///