Greenspan Says U.S. Handling Oil `Reasonably Well' (Update1)
*Ahhh... everything is all rosy, eh Greenspan???...
Greenspan Says U.S. Handling Oil `Reasonably Well' (Update1)
Oct. 12 (Bloomberg) -- Federal Reserve Chairman Alan Greenspan said the U.S. economy has ``weathered reasonably well the steep rise'' in energy prices thanks to market-driven incentives and ``flexibility.''
``The impressive performance of the U.S. economy over the past couple of decades, despite shocks that in the past would have surely produced marked economic contraction, offers the clearest evidence of the benefits of increased market flexibility,'' Greenspan told the National Italian American Foundation in Washington.
Crude oil prices rose 51 percent since the start of the year and surged after hurricanes struck the Gulf Coast, raising an inflation alert at the Federal Reserve. In minutes from their Sept. 20 meeting released yesterday, the Fed suggested that the risk of higher prices appeared to outweigh that of an economic slowdown and said interest rates will probably go higher.
``The flexibility of our market-driven economy has allowed us, thus far, to weather reasonably well the steep rise in spot and futures prices for oil and natural gas that we have experienced over the past two years,'' Greenspan said.
Fed governors and regional Fed presidents have echoed concerns about inflation in recent weeks.
``Inflation in an underlying sense is not high now, but there is a risk that it could go higher, and that's what we are particularly focused on right now,'' Fed Governor Donald Kohn said in Ohio yesterday.
Minutes
In its September minutes, the policy-making Federal Open Market Committee said ``upside risks to inflation appeared to have increased'' after Hurricane Katrina ripped into the Gulf Coast on Aug. 29 and that ``further rate increases probably would be required.'' The Fed voted 9-1 last month to raise its main lending rate to 3.75 percent, the highest in four years. FOMC members next meet November 1.
David Rosenberg, chief North American economist at Merrill Lynch & Co. in New York, said the Fed's target rate will now peak at 4.5 percent in 2006 rather than his previous forecast of 4 percent, citing the central bank's repeated reference to inflation in yesterday's minutes.
Greenspan's remarks today were nearly identical to comments made to the National Association for Business Economics on Sept. 27. The 79-year-old Fed chairman didn't comment in his text on the state of the U.S. economy or on U.S. interest rate policy.
Expectations
Kohn, in his remarks yesterday, stressed the importance of restraining the public's inflation expectations.
``One of the things we learned in the 1970s is that expectations are really, really important,'' Kohn said. ``Energy prices might affect underlying inflation by affecting expectations about future inflation.''
Kohn said the Fed has been raising rates ``because we are concerned, if we don't, that underlying core inflation will rise.''
Greenspan today praised the incentives at work in unregulated markets, where savings help finance new technologies in a process that economist Joseph Schumpeter called ``creative destruction.''
Technologies
``Through this process, wealth is created as high levels of productivity associated with innovative technologies displace less-efficient productive capacity,'' Greenspan said in his text. The 1980s confirmed earlier views that the economy's flexibility would improve with less regulation, Greenspan said. ``Being able to rely on markets to do the heavy lifting of adjustment is an exceptionally valuable policy asset.''
He repeated warnings against protectionism.
``Protectionism in all its guises, both domestic and international, does not contribute to the welfare of American workers,'' Greenspan said.
Greenspan will attend his final Fed policy meeting on Jan. 31, when his non-renewable term as a governor expires. President George W. Bush has not named a successor to Greenspan or nominated candidates to fill two vacancies for Fed governors. White House spokesman Scott McClellan said October 7 the Bush administration is ``moving forward on the nomination'' process.
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