Greenspan: Rates Will Stay Low as Long as Necessary

The exchange between lawmakers and the Fed chief gets heated in his testimony.
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Updated from 11:56 a.m. EDT

The

Federal Reserve

will keep interest rates low for as long as necessary, Chairman Alan Greenspan said Tuesday in his twice-yearly testimony before Congress.

Greenspan noted that industrial production has "stabilized" after months of declines. He said consumer spending has held up "reasonably well" and that the housing market continues to be "strong." But the central bank chair said that data on employment and aggregate output remain "mixed."

The exchange between lawmakers and Greenspan was heated at times. Rep. Bernard Sanders, an independent from Vermont who has confronted Greenspan in the past, accused the Fed chairman of skewing policy toward very wealthy Americans and big corporations. In response, Greenspan said "the U.S. has the highest standard of living of any country its size in the world."

Greenspan also reiterated his concerns about deflation in his speech. "There is an especially pernicious, albeit remote, scenario in which inflation turns negative against a backdrop of weak aggregate demand, engendering a corrosive deflationary spiral," Greenspan said.

In light of that situation, "the FOMC stands prepared to maintain a highly accommodative stance of policy for as long as needed to promote satisfactory economic performance," Greenspan said.

On June 25, the Federal Reserve lowered its benchmark fed funds rate for the 13th time since the beginning of 2001. Rates are now at 1%, their lowest level since 1958. For the last few months, Greenspan has indicated a resolve to ward off deflationary pressures in the economy with low rates.

"Policy accommodation aimed at raising the growth of output, boosting the utilization of resources, and warding off unwelcome disinflation can be maintained for a considerable period without ultimately stoking inflationary pressures," Greenspan said, making the long-term case for his policy.

In the short term, Greenspan said he can cut rates without significant fallout in the bank sector: "Substantial further conventional easings could be implemented if the FOMC judged such policy actions warranted. Doubtless, some financial firms would experience difficulties in such an environment, but these intermediaries have exhibited considerable flexibility in the past to changing circumstances."

Low interest rates have benefited households, Greenspan said. The net worth of households is estimated to have risen 4.5% in the first half of the year, faster than personal incomes.

The recently passed tax cuts will provide a considerable lift to disposable incomes, Greenspan said.

Businesses remain guarded, he said, however: "A pervasive sense of caution reflecting, in part, the aftermath of corporate governance scandals appears to have left businesses focused on strengthening their balance sheets and, to date, reluctant to ramp up significantly their hiring and spending."

Greenspan noted the favorable productivity trend of recent years, but conceded there is a dark side to it. "One consequence of these improvements in efficiency has been an ability of many businesses to pare existing workforces and still meet demand," he said. The unemployment rate rose in June to 6.4%.

The Fed expects GDP growth of 2.5% to 2.75% this year, below previous forecasts of 3.25% to 3.5% growth. The economy grew 1.4% in the first quarter this year.