Greenspan the Optimist

In his testimony before Congress today, Greenspan indicated that he is not worried about a slowdown in the economy in the second half of this year. Some revealing excerpts from his testimony:

[I]n light of the considerable uncertainty surrounding the anticipated evolution of price pressures, the FOMC emphasized that it will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.

Translation: Our first and foremost concern is keeping inflation low.

If economic developments are such that monetary policy neutrality can be restored at a measured pace, a relatively smooth adjustment of businesses and households to a more typical level of interest rates seems likely. Even if economic developments dictate that the stance of policy must be adjusted in a less gradual manner to ensure price stability, our economy appears to have prepared itself for a more dynamic adjustment of interest rates.

Translation: The economy can handle higher interest rates. If we’re worried about anything, we’re worried about inflation rising. But even if we have to raise rates somewhat rapidly to combat growing inflation, the economy will be okay.

The FOMC judged this extended period of exceptionally low interest rates to have been helpful in assisting the economy in recovering from a string of adverse shocks. But in the process of returning the stance of policy to a more neutral setting, at least some of the capital gains on debt instruments registered in recent years will inevitably be reversed.

Translation: Our decision to keep interest rates low for this long was the right one. As we raise rates, though, don’t be surprised if the bond market has a bad year.

In short, financial markets along with households and businesses seem to be reasonably well prepared to cope with a transition to a more neutral stance of monetary policy.

Translation: Nevertheless, financial institutions and households are in good shape, and will do fine as interest rates rise.

My overall impression of his testimony agrees with this quote given in a CNN/Money article:

“All in all, this is significantly more hawkish than I suspect market participants were anticipating,” said Steve Stanley, economist with RBS Greenwich Capital. “Bond market players have been throwing around theories about a second half slowdown, with the June data creating a huge stir, but the Fed has almost not given that idea a second thought.”

Greenspan’s cheeriness on the economy may be because he’s towing the Republican party line on the economy, or it may be due to a genuine belief that the economy won’t slow down later this year as some (including me) think. Whether or not he’s right, his decision to raise rates this year will definitely comprise another entry in the record of Greenspan’s legacy.