From the NY Times:
WASHINGTON, Dec. 7 (Bloomberg News) - Alan Greenspan, the Federal Reserve's longtime chairman, said Wednesday that it was "unwise" to focus the bank's interest rate policy only on reaching a "neutral" level that neither spurred nor restrained economic growth.
The complications associated with inflation "suggest that reliance on a single summary measure such as a neutral real interest rate would be unwise as a strategy for formulating monetary policy," Mr. Greenspan said in a written response on Nov. 28 to questions submitted by Representative Jim Saxton, chairman of the Joint Economic Committee of Congress, after Mr. Greenspan's testimony on Nov. 3. The panel released the responses on Wednesday.
Further down in the article, it looks like Mr. Greenspan is of the opinion that the solution to the "conundrum" is part savings glut and investment dearth.
Asked why long-term bond and mortgage rates had declined even as the Fed raised short-term rates, Mr. Greenspan said that lower inflation, high global savings and "low levels of intended investment" had pushed down long-term rates worldwide in the last 10 years.
Greg Ip adds a bit concerning the yield curve in the WSJ (subscription required):
In his letter, Mr. Greenspan, as he has in the past, questioned the usefulness of the gap between short- and long-term interest rates, or "yield curve," in forecasting economic growth. Historically, a narrowing of that gap, called a "flattening" yield curve, has foreshadowed slower growth. When short-term rates rise above long-term rates, a recession often follows. The yield curve has flattened significantly in the past year, which some analysts say portends a sharp slowdown.
The full text of the letter is available at the WSJ website.
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