CBSN

Mr. Greenspan Plays A Pat Hand

Federal Reserve Chairman Alan Greenspan smiles as he prepares to give testimony before the Senate Banking Committee on Capitol Hill Tuesday, July 16, 2002. Greenspan told the panel the economy is on the road to full recovery but will keep feeling the effects of last year's recession. Corporate executives should be held accountable to accurately state the financial condition of their companies, he said.(
AP
As expected, the Federal Reserve on Tuesday kept a major short-term interest rate at a 45-year low.

Fed Chairman Alan Greenspan and his Federal Open Market Committee colleagues, the group that sets interest rate policy in the United States, kept the federal funds rate at 1 percent. The funds rate is the interest banks charge each other on overnight loans and is the Fed's primary tool for influencing economic activity.

The decision was unanimous.

In its statement, the FOMC said no inflationary pressures are present. Spending is firming, the committee said, but labor markets are mixed.

"In these circumstances, the committee believes that policy accommodation can be maintained for a considerable period," the FOMC said.

The committee said that the risk of an "unwelcome fall in inflation" - although "minor" - is likely to be the "predominant concern for the foreseeable future."

Ahead of the meeting, traders were speculating that the Fed might come out more bullish on growth and less worried about deflation, which would validate recent moves in financial markets.

Alternatively, others suggested that the Fed might want to slow the rout in
the bond market by reiterating that low rates could persist for a very long time.

The Fed has cut its federal funds target rate 13 times since January 2001 by a total of 5.5 percentage points to the lowest level in more than 40 years.

The most recent move came in late June, a quarter percentage point cut, described by Fed officials as insurance against deflation.
At that June meeting, the FOMC said the economy had "yet to exhibit sustainable growth."

One member of the committee, San Francisco Fed President Robert Parry, voted to cut rates by a half percentage point.

Since June, however, signs of a turnaround in the economy have mounted. In particular, capital spending by businesses, a key missing ingredient to robust growth for three years, is rising, helping the moribund manufacturing sector.

Retail sales have also strengthened, in part because the latest round of tax cuts is showing up in weekly paychecks. Disposable incomes have been boosted by lower mortgage payments and cash-out refinancings.

The economy is still not creating any jobs. Firms have reduced their payrolls for six months in a row, something that's never been seen outside a recession in the post-World War II era.

Bond yields have jumped a full percentage point since Greenspan's congressional testimony a month ago. The backup in interest rates reflected in part the stronger economic news, but also the new perception that unconventional deflation fighting tactics are an extremely remote possibility.

Fed officials have emphasized that stronger economic growth will not necessarily end the threat of further disinflation. With so many unutilized resources, it could take several quarters of above-trend growth to wring the excess capacity out of the system and remove the deflationary threat.