Updated from 1:13 p.m. EDTFederal Reserve Chairman Alan Greenspan is in no hurry to raise interest rates. At least, that's the message economists took away from the Fed Chief's testimony before the Joint Economic Committee Wednesday. "This is Greenspan saying we're not in any rush here," said Ethan Harris, senior economist at Lehman Brothers. "I thought this was a pretty dovish speech." Investors rendered a mixed judgment. After falling precipitously after Greenspan's first day of testimony, the Dow managed only a 3-point gain Wednesday. The Nasdaq added 17 points, erasing about half its Tuesday tumble. In prepared remarks, Greenspan acknowledged that the pace of economic expansion and the weak dollar were leading to some "price pressures," and he reiterated that the federal funds rate "must rise at some point." But he also said that inflation remains contained so far because productivity growth remains so strong and labor costs have not yet turned decisively upward. Although the job market is improving, he noted that businesses are still exhibiting "cautious behavior" and said worker insecurity is high. "Greenspan's comments weren't all that bad," said Gary Thayer, chief economist at A.G. Edwards. "He suggested that broad-based inflationary pressures aren't building, so it left the door open for the Fed to remain at least somewhat patient." Thayer noted that if labor costs increase going forward or productivity growth begins to slow, "people will be more concerned about how long the Fed will wait." After Greenspan's speech Tuesday, many investors were bracing for hawkish remarks on Wednesday. In testimony before the Senate Banking Committee, Greenspan said deflation is no longer an issue and he noted that the banking industry is well prepared for a rise in interest rates.
"Yesterday's tidbits ... were more hawkish than today's comments," Harris said. "The section on inflation in the speech was pretty short given that this is really most troubling area of the recent data." Harris said the annualized rate of core CPI inflation was 2.9% in the first quarter, up from 1.1% last year. The consumer price index rose 0.5% in March, much more than expected and almost twice the 0.3% rise seen in February. Excluding food and energy, the CPI rose 0.4%, twice the gain in February. Although import prices have firmed modestly, Greenspan said, strong productivity and overcapacity in some areas "have checked any sustained acceleration of the general price level and should continue to do so for a time." "As yet, the protracted period of monetary accommodation has not fostered an environment in which broad-based inflation pressures appear to be building," he said. "But the Federal Reserve recognizes that sustained prosperity requires the maintenance of price stability and will act, as necessary, to ensure that outcome." Ashraf Laidi, chief currency analyst at MG Financial Group, said Greenspan "stuck to his cautious optimism by emphasizing the end of deflation, rather than the confirmed beginning of inflation." Still, Laidi, who expects a 60% chance of a rate hike in June, said he still thinks the Fed will shift its policy stance. "Should the committee attempt to send a more forceful hint about tightening monetary policy, it will drop the phraseology that it is being patient in lifting its policy accommodation," he said. Greenspan told Congress Wednesday that the prospects for sustainable economic growth are "good." But gross domestic product is not likely to advance at the same pace it did in the second half of 2003, when real GDP increased at an annual pace of more than 6%. "Some of the strains that accompanied the difficult business environment of the past several years apparently still linger," he said.
Many business are still reluctant to anticipate and prepare for future orders, and business investment has risen only "modestly," he said. Greenspan said the labor market appears to be "gradually improving" and that the pace of hiring should pick up on a more sustainable basis in the future. The latest labor report showed that 308,000 new jobs were created in March, the best performance in four years. Still, Greenspan noted that insecurity among workers has seen a "notable rise." "The anxiety that many in our workforce feel will not subside quickly," he said, noting that the average duration of unemployment increased to 20 weeks in March of this year from 12 weeks in September 2000. He also said that around 85,000 unemployed workers per week lost their unemployment insurance benefits -- more than twice the 35,000 per week in September 2000. In the question-and-answer session following the testimony Wednesday, Greenspan declined to say whether the Fed would wait for more economic data before making changes to monetary policy or the policy statement.