Greenspan soothes rate hike fears

Mr Greenspan appears uncertain about the US recovery

The US Federal Reserve is expected to leave interest rates unchanged until an economic recovery in the US has gained a strong foothold, analysts said after having listened to a key speech by the Fed chairman Alan Greenspan.

The major increase in oil prices was referred to not as a factor for inflation, but as dampening to economic growth

Lynn Reaser
chief economist
Banc of America

"He certainly makes it sound like interest rate rises are going to come later rather than sooner and that the whole outcome of the recovery is still very much in question," said DA Davidson fixed income trader Mary Ann Hurley.

Mr Greenspan told a Joint Economic Committee hearing in Washington that although the economy is expanding at a significant pace, the degree of strengthening in final demand over coming months remains uncertain.

Mr Greenspan also expressed strong concerns about high global oil prices which are putting pressure on US producers' profit margins.

"The major increase in oil prices was referred to not as a factor for inflation, but as dampening to economic growth," said Banc of America chief economist, Lynn Reaser.

No inflation fears

"The new elements are that he is concerned about oil prices," said head of interest rate strategy at Credit Suisse First Boston, Dominic Konstam.

The Fed will probably be raising rates, but they can wait until they are convinced that things are doing better

Gary Thayer
chief economist
AG Edwards & Sons

"He's saying very plainly that he wants evidence of a solid expansion - in business investment and in consumer spending [before rates would be raised]".

"He's not worried about the housing bubble. He's not worried about overstimulating the economy or the consumer," said Mr Konstam.

Inflation pressures in the US are well contained, despite recent surges in oil prices, Mr Greenspan told the committee.

Cuts during summer?

The speech appeared to confirm analysts' predictions that US interest rates are set to remain unchanged until during or after summer.

"The Fed will probably be raising rates, but they can wait until they are convinced that things are doing better," said AG Edwards & Sons chief economist Gary Thayer.

"If oil prices don't stay high for long the Fed should start taking back rate hikes [in June]. If it looks like higher oil prices will stay and weigh on consumer confidence, the Fed may hold off raising rates for a while."

The Fed cut the key US interest rate to 1.75% last year, its lowest level in 40 years.

The rate cuts aimed to alleviate the pains of the US recession which begun in March 2001 and to bring about a recovery.