WASHINGTON -- Federal Reserve Board chairman Alan Greenspan yesterday left the door open for another round of credit-tightening but did not make it clear when Fed officials may act.
Testifying before the Senate Banking Committee, Greenspan said, "The economy is doing well, there's no question about it, it's solid." He added that although the economy is slowing from the "fairly exuberant" pace of growth recorded late last year and early this year, "it's still unclear" how much slackening is taking place.
Fed officials have indicated that they expect to see the economy slow to around a 2.5% rate of growth before the year is out to contain the threat of rising inflation.
However, recent economic indicators have turned out to be stronger than expected and raised bond market fears that officials will feel compelled to lift short-term rates at next Tuesday's meeting of the Federal Open Market Committee. The rise in gold prices toward $400 an ounce and other signs of increasing inflation have added to worries that Fed officials will not wait until the Nov. 15 FOMC meeting to act.
Greenspan's comment that he was uncertain how much growth is slowing seemed to indicate that policymakers will wait to get more information about how the economy is responding to the five rate increases they have put in place this year. "It points to a decision of not doing anything at the September meeting," said Darwin Beck, managing director at CS First Boston.
Beck noted that the Fed is still collecting economic data from August, which is when officials last tightened credit by boosting the federal funds rate to 4.75% from 4.25%. Moreover, he said, officials do not like to raise rates before an election and risk becoming a topic of political debate.
"They just like to keep a low profile. They're supposed to be apolitical," Beck said.
Greenspan appeared before the Banking Committee to present an assessment along with other federal bank regulators about the overall condition of the banking industry. The hearing was a kind of public farewell and salute to chairman Donald Riegle, D-Mich., who is retiring after six years as head of the committee and 28 years in Congress.
Normally, even Greenspan is reluctant to comment on the economy
in public shortly before an FOMC meeting, but he did not decline to do so this time as an apparent courtesy to Riegle.
Asked about the international economy, Greenspan noted that other industrial nations are enjoying a rebound. "There is a fairly broad global expansion going on," he said.
Fed officials have said that they expect a strengthening world economy to add to U.S. growth by boosting exports. That in turn would presumably add to inflationary pressures unless the domestic economy is weak, which is not the case now.
However, so far there is no sign that the U.S. trade deficit is narrowing and padding growth in gross domestic product. The Commerce Department reported on Tuesday that the trade gap swelled to $11 billion in July.
Greenspan said the banking industry has staged an "amazing" comeback from only four years ago, when many banks were crippled by bad loans that hurt their balance sheets and made them reluctant to lend. "The U.S. commercial banking system remains the centerpiece of the nation's financial system," he told the panel.
Greenspan also said that the Fed and other bank regulators are getting "pretty close" to coming up with a common set of rules for derivatives, but he stressed that the issues are "extremely complex."
Regulators remain reluctant to support legislation on derivatives for fear of locking in restrictions that would needlessly restrict the ability of banks to manage risk, he said.
Among the 50 largest banks, only three recorded trading losses during the first six months of the year when the bond market was wracked by the upturn in interest rates, Greenspan said. Those with losses had them in their mortgage business, not derivatives.
Meanwhile, the Federal Deposit Insurance Corp. reported that commercial banks earned $11.2 billion in the second quarter, the second highest quarterly total on record. The agency said a strengthening economy helped keep loan losses low while loan growth was "robust."
