Alan Greenspan is widely expected to bump up interest rates this week, raising borrowing costs for millions of Americans. But even the prospect of that politically unpopular action is not likely to deter the Senate from approving Greenspan to a fourth term as chairman of the Federal Reserve.
Greenspan sailed through a confirmation hearing before the Senate Banking Committee last Wednesday, pledging to promote greater openness at the traditionally secretive central bank and make sure inflation doesn’t get out of control and jeopardize the current expansion the U.S. economy is enjoying.
Committee Chairman Phil Gramm, R-Texas, said he expects his panel to clear Greenspan’s renomination on Feb. 1 with Senate approval later that day.
If you were forced to try to narrow down the credit for the golden age that we find ourselves living in … I think your name would have to be at the top of the list, Gramm said. Other members of the panel gave Greenspan the bulk of the credit for the economy’s remarkable performance: strong economic growth, plentiful jobs and low inflation. In February, the expansion will be the longest ever on record.
Greenspan, who has been at the helm of the Fed since 1987, did not directly comment on what the Fed’s next move on interest rates might be. However, many economists predict that Fed policy-makers will boost interest rates by a quarter of a percentage point on Feb. 2 in an effort to slow the red-hot economy and keep inflation from escalating. The Fed raised rates three times last year, a move that makes borrowing more expensive for businesses and consumers.
Economists said Greenspan’s testimony offered no new or surprise messages to financial markets. Wall Street, which had fallen sharply last Monday on fears of what Greenspan might say in his congressional testimony, was subdued.
But economists were intrigued by Greenspan’s comments that the Fed is studying the recent high levels of borrowing by investors to buy stocks. While Greenspan expressed concern over the matter, he noted the Fed is reluctant to exercise its authority to tighten limits on such borrowing, a practice known as buying on margin. Studies have suggested that a rising level of stock prices is unrelated to liberal margin requirements, Greenspan said.
Even though Greenspan didn’t say he had any particular policy steps in mind, it’s one more piece of evidence that the Fed is concerned that the stock market is getting ahead of itself and is a risk to the expansion, said Mark Zandi, an economist with Regional Financial Assoc.
On the budget front, Greenspan repeated his preference that huge federal surpluses be used to reduce the national debt rather than for tax cuts or more government spending. Greenspan also expressed support for a decision the Clinton administration has made in its new budget to seek a boost in restrictive federal spending caps in light of the rising surpluses.
Greenspan said he would prefer that the government adhere to the current caps that were established as part of the 1997 balanced budget law. But he said that increasing those limits slightly to allow more government spending on discretionary programs was preferable to engaging in spurious mechanisms to evade them,” as Congress has done in the past two years.
On trade, Greenspan said the U.S. can’t continue over the long term to carry swelling trade deficits without causing serious damage to the economy.
Greenspan said the Fed has a new appreciation that `we also need to explain to the public what we are doing and why.” Last week, the Fed said it would release a statement at the end of every meeting revealing Fed thoughts on inflation dangers even if the session does not result in a change in interest rates. (AP)
