Alan Greenspan sees good pace of growth

Federal Reserve chairman Alan Greenspan's semi-annual economic report to the US Congress yesterday gave no indication that he will be deviating significantly from his stated aim of tightening monetary policy at a "measured" pace.

Greenspan sees 'good pace' of growth, bond market 'conundrum'
The US economy is growing at a "reasonably good pace," with inflation in check, but could face problems from slow job growth and weak savings, Federal Reserve Chairman Alan Greenspan said. The central bank chief predicted growth this year of up to 4.0 percent, inflation below 1.75 percent and the unemployment level also falling during 2005. Greenspan also said he was puzzled by the behavior of the bond market, where interest rates have turned lower even as the US central bank has been raising rates. He called the phenomenon "a conundrum" that will take time to understand...

Yes, the Fed chairman is puzzled by the failure of long-term interest rates to rise in the face of rising short-term rates. In raising the federal funds rate, Alan Greenspan obviously must be hoping for long-term rates to rise as well to provide an effective brake on credit growth. However, foreigners -- mostly central banks -- have been buying US dollar assets feverishly, thwarting the Fed chairman's objective. Greenspan had, of course, addressed the foreign element more directly in a speech back in November last year at the European Banking Congress.

[A] diminished appetite for adding to dollar balances must occur at some point. But when, through what channels, and from what level of the dollar? Regrettably, no answer to those questions is convincing.

As for Greenspan's relatively optimistic outlook for the US economy, that seems justified by the latest economic news.

Housing Starts Rise to Nearly 21-Yr High
A jump in starts on single-family housing pushed total U.S. housing starts to a nearly 21-year high in January, but other data released on Wednesday were not as robust. Home mortgage applications dipped last week and industrial production was flat in January as warm weather dampened demand for heating and dragged down utilities output...

U.S. housing starts climbed 4.7 percent to a seasonally adjusted annual rate of 2.159 million units in January from an upwardly revised 2.063 million unit pace a month earlier, the Commerce Department reported. The January total marked the highest pace of housing starts since February 1984 when they hit a 2.260 million unit pace...

Applications for U.S. home mortgages decreased slightly last week as a drop in home purchasing activity offset an uptick in refinancing, the Mortgage Bankers Association said. The industry group said its seasonally adjusted index of mortgage application activity decreased 0.5 percent to 732.3 in the week ended Feb 11, after rising 4.2 percent in the prior week survey...

U.S. industrial production was flat in January, but manufacturing output remained healthy, the Federal Reserve reported... Output at factories, the largest component of industrial production, rose 0.4 percent in January, matching its December gain. Manufacturing capacity use rose to 78.0 percent, the highest rate since December 2000...

Despite the weekly drop in mortgage applications, the overall picture still looks one of relatively robust expansion. Look for continued Fed tightenings ahead.