Following are selected comments from Federal Reserve Chairman Alan Greenspan’s testimony to the Joint Economic Committee. Comments include excerpts from both his prepared statement and the question-and-answer period that followed.
ON THE STATE OF THE ECONOMY
We do not yet have sufficient information on economic activity following the end of hostilities to make a firm judgment about the current underlying strength of the real economy. Incoming data on labor markets and production have been disappointing. Payrolls fell further in April, and industrial production declined as well. Because of the normal lags in scheduling production and in making employment decisions, these movements likely reflect business decisions that, for the most part, were made prior to the start of the war, and many more weeks of data will be needed to confidently discern the underlying trends in these areas. ...
Looking ahead, the consensus expectation for a pickup in economic activity is not unreasonable, though the timing and extent of that improvement continue to be uncertain.
ON ALTERNATIVE POLICY TOOLS
Should it turn out that, for reasons which we don’t expect, but we certainly are concerned may happen, the pressures on the short-term markets drive the federal funds rate down close to zero, that does not mean that the Federal Reserve is out of business on the issue of further easing and expansion of the monetary base.
We indeed, as you point out, can merely move out on the yield curve, because as you’re well aware, even though short-term rates are something slightly over 1 percent, longer-term rates are up significantly above that. And we do have the capability, should that be necessary, of clearly moving out on the yield curve, essentially moving longer-term rates down and in the process expanding the monetary base and the degree of monetary stimulus.
And since there is such a significant amount of potential in that longer-maturity structure, we see no credible possibility that we will at any point, irrespective of what is required of us, run out of monetary ammunition to address problems of deflation or anything similar to that which disrupts our economy.
ON DEFLATION
We at the Federal Reserve recognize that deflation is a possibility. Indeed we now have been putting very significant resources in trying to understand, without actually seeing it happen, what this phenomenon is all about.
We cannot say that in the marketplace that there is a severe increasing concern of deflation. Indeed the various expectations of price by both business and consumers has been relatively flat for recent years.
Nonetheless, even though we perceive the risks as minor, the potential consequences are very substantial and could be quite negative. So we have created fairly significant resources to try to address this problem, increasing our knowledge of what actually happens, what’s the process and what tools are necessary to fend it off. ...
We believe that because in the current environment the cost of taking out insurance against deflation is so low that we can aggressively attack some of the underlying forces, which are essentially weak demand. And indeed we’ve done that since we started a very aggressive easing in monetary policy in early 2001.
So long as the costs of engaging disinflation are so low, we have moved fairly considerably ... to recognize this not as an imminent, dangerous threat to the United States, but a threat that, even though minor, is sufficiently large that it does require very close scrutiny and maybe, maybe, action on the part of the central bank.
ON FISCAL STIMULUS
Clearly we at the Federal Reserve perceive monetary policy as the primary tool in this government for short-term monetary and for short-term stimulus.
It’s been the general conclusion of economists over the years that the difficulty in timing fiscal policies ... makes it difficult to calibrate fiscal policy in a timely manner.
I still think that monetary policy should take the lead in the short run, largely because we can move on 20 minutes’ notice, in 10 minutes if necessary, where that is obviously not feasible in the fiscal ring.
ON MONEY MARKET RATES
(Greenspan was asked about concerns that lower interest rates could interfere with the functioning of money market mutual funds.)
As you can imagine, Federal Reserve staff is focused on this issue in some considerable detail. And we have pretty much concluded where the key points of difficulties are and in what types of funds and what type of instruments held by money market mutual funds, which is where the critical problems arise.
We haven’t completed our studies yet fully. And I don’t want to prejudge where we go, but there is obviously a question that you have significant impacts as you move short-term rates down through where the margins of money market mutual funds are.
ON EXTENDING JOBLESS BENEFITS
I would suggest that if you go forward with additional extensions, I would be careful to keep the extensions relatively short and renew them again if necessary. Because we’re not quite clear at this stage what the path of short-term economic activity is.
ON DEFICITS AND RATES
The point I was making is, deficits do matter, and that in any evaluation of a program what happens to deficits is an integral part of the analysis.
What is missing here and was never missing in previous discussions is restraint on spending. And I think that I would very much like to see that issue addressed far more than it is. I must say, the silence is deafening.
ON THE DOLLAR
We in the United States government have made a decision in which the value of the American currency will be discussed only by our chief economic spokesman, which is the secretary of the Treasury. And we at the Fed have adhered to that for quite a good, long period of time and think it’s important to have one voice speaking on that issue.
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