Greenspan Sees $60 Oil Shave Off 0.75 % Growth

Tuesday, July 19, 2005

Oil prices above $60 are likely to shave off three quarters of a percentage point from GDP growth, Federal Reserve chairman Alan Greenspan told Reuters in a story published in the Washington Post on Monday:
Although soaring oil prices have hampered U.S. economic growth, the economy is coping well and is set to expand at a moderate pace, Federal Reserve Chairman Alan Greenspan said in remarks released on Monday.
Greenspan said Fed research found that the rise in oil prices since 2003 to above $60 a barrel is likely to shave about three-quarters of a percentage point from the U.S. gross domestic product this year. Rising energy costs sapped growth by a half-percentage point in 2004, he said in written responses to questions from Congressional Joint Economic Committee Chairman Jim Saxton, a New Jersey Republican.
"Aside from these 'headwinds' the U.S. economy seems to be coping pretty well with the run-up in crude oil prices," the Fed chairman said in a letter dated July 11.
Markets and economic analysts are waiting attentively for Greenspan's semiannual testimony before Congress on Wednesday and Thursday to provide clues on how much longer the Fed plans to sustain its string of nine quarter-point interest rate boosts.
The central bank head also said flat long-term interest rates, despite the Fed's short-term rate hikes, should not be interpreted as a clear sign of economic faltering.
"A sharp flattening of the yield curve is not a foolproof indicator of economic weakness," he said.
Greenspan said most statistical models that look at the yield curve - different interest rates along the spectrum of Treasury debt maturities - to forecast economic trends project moderate growth.
"Movements in bond yields should not be assessed in isolation but need to be interpreted in the context of overall domestic and foreign economic and financial developments," he said.

Greenspan's remarks pushed the 10-year yield to a two-month high of 4.22 percent and supported the dollar against the Euro.
UPDATE: Mark Thoma picked up one more piece of Greenspeak about the housing bubble in the Wall Street Journal and Tim Duy says the Fed is on track for more tightening. Who does not agree on this one?

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