“The picture has brightened.” That was Federal Reserve Chairman Alan Greenspan’s assessment of the U.S. economy in his semiannual report to Congress this morning.

“The gross domestic product expanded vigorously over the second half of 2003 while productivity surged, prices remained stable, and financial conditions improved further. Overall, the economy has made impressive gains in output and real incomes; however, progress in creating jobs has been limited,” he said.

Not only that, but also “looking forward, the prospects are good for sustained expansion of the U.S. economy,” the Fed chairman said.

All this good economic news presumably would support an increase in the Fed’s benchmark interest rate; however, that is not to be the case–at least for now.

Interest rate sensitive sectors of the economy, namely automotive sales and housing, along with consumer spending fueled by mortgage financings are what’s keeping the economy afloat beneath those other factors. The Fed isn’t inclined to mess with this economic support beam.

“The lowest home mortgage rates in decades were a major contributor to record sales of existing residences, engendering a large extraction of cash from home equity. A significant part of that cash supported personal consumption expenditures and home improvement. In addition, many households took out cash in the process of refinancing, often using the proceeds to substitute for higher-cost consumer debt. That refinancing also permitted some households to lower the monthly carrying costs for their homes and thus freed up funds for other expenditures. Not least, the low mortgage rates spurred sales and starts of new homes to very high levels,” Greenspan told Congress.

But the Fed hinted yet again that low interest rates aren’t permanent and will have to be raised at some time in the future. The current “accommodative posture is appropriate to foster sustainable expansion of economic activity,” Greenspan said. However, “such a policy stance will not be compatible indefinitely with price stability and sustainable growth; the real federal funds rate will eventually need to rise toward a more neutral level.”

The powerful Fed chairman definitely seemed worried about the fast-inflating federal deficit balloon. The federal budget posted a surplus a few years back, but was $375 billion in the red last year and “appears to be widening conside

Show Comments Hide Comments

Comments

Sign up for Inman’s Morning Headlines
What you need to know to start your day with all the latest industry developments
Success!
Thank you for subscribing to Morning Headlines.
Back to top