Greenspan: Economy to Expand Despite Oil

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 (search) Chairman Alan Greenspan (search) said in remarks released 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 (search) Chairman Jim Saxton (search), 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.

Treasury debt prices dipped on what traders viewed as an optimistic tone in Greenspan's letter, suggesting the Fed may continue its campaign of raising short-term interest rates for some time before taking a break.

"In essence the bond market could treat this as a preview of his testimony starting on Wednesday — implying continuity on policy," strategists at Action Economics said in a research note.

The yield on the benchmark 10-year Treasury jumped to two-month highs of 4.225%. The news also helped the dollar, which was weaker across the board, pare losses against major European currencies.

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.