Greenspan addressed the joint economic committee on Thursday on the state of the economy and while there were good points, the future remains questionable, primarily because the long-term lows of long-term interest rates are “clearly without precedent”.
Greenspan addressed a number of issues but the biggest issue perhaps was the persistence of low long-long term interest rates despite the Fed having raised the short-term rate by two percentage points in the last year. The short-term rate is the amount banks charge each other for over night loans.
He said the long-term interest rates, tied to the 10-year Treasury note, were the biggest surprise of the year. They continued to remain low, despite an increase in the federal funds rate. The yield on the 10-year notes was lower than a year ago. These continued rates keep the housing industry booming in the United States.
The long-term rate keeps the housing boom going. The houses continue to go up all over the country. Refinances on mortgages continue to boom as well, with some people refinancing multiple times. While the chairman didn’t think there was a bubble, he did say there was some speculation going on.
“Among the biggest surprises of the past year has been the pronounced decline in long-term interest rates on U.S. Treasury securities despite a 2-percentage-point increase in the federal funds rate,” said the Fed chairman.
The Conundrum
The biggest question the Fed, economists and many business leaders have is why are the long-term interest rates staying as low as they are. Greenspan had a number of hypotheses on the matter but could offer no solid answer for any of them.
Greenspan recently addressed a monetary conference in Beijing and offered his hypotheses there. He listed several other possibilities including the breakdown of the former Soviet Union as well as the possibility of pension fund problems in developed countries.
“One prominent hypothesis is that the markets are signaling economic weakness,” said Greenspan. “This is certainly a credible notion. But periodic signs of buoyancy in some areas of the global economy have not arrested the fall in rates.”
It would seem that the only thing he knew for sure is that they don’t know for sure. He suggested there’s a lot going on in the world and economies are changing in ways no one entirely realizes and that policy makers should in essence be ready for anything.
“The economic and financial world is changing in ways that we still do not fully comprehend. Policymakers accordingly cannot always count on an ability to anticipate potentially adverse developments sufficiently in advance to effectively address them. Thus our economies require, in my judgment, as high a degree of flexibility and resilience to unanticipated shocks as is feasible to achieve. Policymakers need to be able to rely more on the markets’ self-adjusting process and less on officials’ uncertain forecasting capabilities.”
John Stith is a staff writer for murdok covering technology and business.
