alan greenspan : semiannual monetary policy report to the us congress testimony of mr alan greenspan, chairman of the board of governors of the us federal reserve system, on the occasion of the federal reserve board ’ s semiannual monetary policy report to congress, before the committee on financial services, us house of representatives, 20 july 2005. mr greenspan presented identical testimony before the committee on banking, housing, and urban affairs, us senate on 21 july 2005. * * * mr chairman and members of the committee, i am pleased to be here today to present the federal reserve's monetary policy report to the congress. in mid - february, when i presented our last report to the congress, the economy, supported by strong underlying fundamentals, appeared to be on a solid growth path, and those circumstances prevailed through march. accordingly, the federal open market committee ( fomc ) continued the process of a measured removal of monetary accommodation, which it had begun in june 2004, by raising the federal funds rate 1 / 4 percentage point at both the february and the march meetings. the upbeat picture became cloudier this spring, when data on economic activity proved to be weaker than most market participants had anticipated and inflation moved up in response to the jump in world oil prices. by the time of the may fomc meeting, some evidence suggested that the economy might have been entering a soft patch reminiscent of the middle of last year, perhaps as a result of higher energy costs worldwide. in particular, employment gains had slowed from the strong pace of the end of 2004, consumer sentiment had weakened, and the momentum in household and business spending appeared to have dissipated somewhat. at the may meeting, the committee had to weigh the extent to which this weakness was likely to be temporary - - perhaps simply the product of the normal ebb and flow of a business expansion - - and the extent to which it reflected some influence that might prove more persistent, such as the further run - up in crude oil prices. while the incoming data highlighted some downside risks to the outlook for economic growth, the fomc judged the balance of information as suggesting that the economy had not weakened fundamentally. moreover, core inflation had moved higher again through the first quarter. the rising prices of energy and other commodities continued to place upward pressures on costs, and reports of greater pricing power of firms indicated that they might be more able to pass those higher costs on to their customers. given these considerations, the committee continued the process of

, we felt the need for dynamic provisioning because of very clear “ negative carry ” in these transactions. however, our pioneering attempt to apply this approach had to be undone in the midst of much incomprehension and recrimination. the proposal did not meet the approval of our accountants and auditors because of their steadfast adherence to their accounting principles, to the great delight of our single shareholder who thus got an unusually large second transfer of profit from the bank in a year when it would have been more prudent to provide for expected losses on the horizon. there is therefore in a world of uncertainty a need for everyone to be a bit less hide - bound by current practice and to be a little more forwardlooking. let me conclude by mentioning that bankers, accountants, regulators and for that matter, all of us, function in a world of increasing uncertainty. as keynes put it, “ anticipating what average opinion expects the average opinion to be.. ” leads to herding behaviour. we cannot altogether eliminate uncertainty but we should certainly use our judgment to anticipate, even act pre - emptively and respond with alacrity to emerging situations. i have detailed how we at the bank through various actions and measures have endeavoured to ensure the stability of the domestic financial system. to recapitulate, we were vigilant and took anticipatory measures where possible and responded with promptitude to emerging situations. a banking system working on sound principles, aided by prudent regulation and close supervision, ensured that the sector remained sound and stable. we concerted our action increasingly with government initiatives. we facilitated the orderly functioning of the market. we adopted an appropriate monetary policy and exchange rate management framework. all this contributed to mauritius weathering the storm. as a parting remark, let me add that for policy - makers in a small island state, situated quite far from its major trade partners, and surrounded by a sea of uncertainty, an ocean of threats and perils, the price to pay to ensure our continued economic salvation is eternal vigilance. it is a price that we are prepared to pay. it is a price that we pay everyday. thank you for your attention.