(July 20 – 11: 20 ET) – Federal Reserve Board Chairman Alan Greenspan did not spook traders with his monetary policy testimony before the Committee on Banking, Housing, and Urban Affairs this morning as was feared. Instead his comments are sparking a rally.
Greenspan warned that the Fed is still vigilant for signs of inflation, “It has been clear to us that, with labor markets already quite tight, a continuing disparity between the growth of demand and potential supply would produce disruptive imbalances.”
But he seemed to signal that the Fed is buying the slowdown story, noting, “It is certainly premature to make a definitive assessment of either the recent trends in household spending or what they mean. But it is clear that, for the time being at least, the increase in spending on consumer goods and houses has come down several notches, albeit from very high levels.”
Greenspan suggested that the spending slowdown is easing the labour constraint slightly and any growth is coming through productivity improvements. A situation he’d like to see persist, “A lower overall rate of economic growth that did not carry with it a significant deterioration in productivity growth obviously would be a desirable outcome. It could conceivably slow or even bring to a halt the deterioration in the balance of overall demand and potential supply in our economy.”
Traders are buying aggressively on the news that the Fed is at least partly convinced that its policy moves are working.
Greenspan warned that the Fed isn’t done for good however, “By our meeting this June, the appraisal of all the foregoing issues led the Federal Open Market Committee to conclude that, while some signs of slower growth were evident and justified standing pat at least for the time being, they were not sufficiently compelling to alter our view that the risks remained more on the side of higher inflation.”
-IE Staff