economy still improving

[strandinthewind]

Greenspan: Solid growth, more hikes
Fed chairman tells House panel 'significant uncertainties' could alter positive economic outlook.
July 20, 2005: 10:36 AM EDT

WASHINGTON (Reuters) - Federal Reserve Chairman Alan Greenspan, in probably his last semi-annual testimony to Congress, said Wednesday that the U.S. growth outlook was solid and the Fed should keep raising interest rates.

But he warned "significant uncertainties" surround this positive prospect, including the high price of energy, labor costs, the future behavior of low long-term interest rates and the danger this could spell for the country's housing market.

"Our baseline outlook for the U.S. economy is one of sustained economic growth and contained inflation pressures," he told the House Banking Committee in the text of his remarks, made available to the media before delivery.

"In our view, realizing this outcome will require the Federal Reserve to continue to remove monetary accommodation. This generally favorable outlook, however, is attended by some significant uncertainties that warrant careful scrutiny," said Greenspan, who is due to stand down at the end of January.

Turning to long-term yields that have stayed low in the face of rising official interest rates, Greenspan said their decline was "without precedent" and warned their future behavior was a risk to the outlook.

Part of the danger lies in the fact that low borrowing U.S. costs have contributed to a boom in U.S. house prices, with Greenspan citing "speculative fervor" in some markets.

The Fed has raised interest rates in nine quarter-percentage point steps since June last year to 3.25 percent and is expected by financial markets to keep going to around 4.0 percent by the end of 2005.

In his testimony, Greenspan cited the last Fed policy committee statement, which said the Fed expects to raise rates at a "measured" pace.

The 79-year old chairman, due to retire in January, said it was not clear if U.S. unit labor costs would keep on a modest upward path and warned this could have an important impact on inflation.

A spike in oil prices above $60 per barrel along with other energy price rises posed another important risk.

A flattening in prices would be good for inflation, but Greenspan noted that financial futures markets see little chance of a decline in energy costs "for years to come."

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