Alan Greenspan, chairman of the Federal Reserve Board, said on Tuesday that the economic expansion appears to be "self-sustaining," and warned that interest rates could rise more swiftly if inflation turns out to be worse than he expects.
"We cannot be certain that this benign environment will persist and that there are not more deep-seated forces emerging as a consequence of prolonged monetary accommodation," Greenspan told the Senate Banking Committee.
In a carefully hedged presentation, Greenspan veered little from the Fed's basic message when it raised interest rates on June 30, and said in a statement that it hoped to keep raising them at a "measured" pace over the next year.
But Greenspan dashed hopes of Wall Street investors who thought the Fed might raise interest rates more slowly in response to fresh evidence that consumer price increases moderated last month and economic growth appears to have cooled in the last two months.
If anything, he stepped up his warning about the uncertainties that surround the outlook for both growth and inflation.
"If economic developments are such that monetary policy neutrality can be restored at a measured pace, a relatively smooth adjustment of businesses and households to a more typical level of interest rates seems likely," Greenspan said.
Many analysts, particularly in the bond markets, have sharply criticized the Fed for keeping interest rates too low for too long and ignoring signs of incipient inflation.
Greenspan reiterated his view that recent price increases are mainly the result of "transitory factors," such as higher oil prices.
He also expanded on his view that corporate profits have been so high that businesses have ample room to offer higher wages without raising prices to consumers.
The surprisingly tentative tone of Greenspan's outlook contrasted with his more extended attempt in his testimony on Tuesday to buttress his view that core inflation, which excludes volatile areas like food and energy prices, is likely to remain below 2 percent through the end of next year.
But despite Greenspan's optimism about inflation remaining under wraps, he cautioned investors against thinking that the Fed might feel less constrained in unwinding its cheap-money policies of the past three years.
While acknowledging that higher prices had led to a "soft patch" in consumer spending and growth, he predicted that the economy would continue to expand and brushed aside a new report by the Commerce Department, which showed that housing starts plunged 8.5 percent last month.
"Despite the softness of recent retail sales," Greenspan said, "the combination of higher current anticipated future income, strengthened balance sheets and still-low interest rates bodes well for consumer spending."
In its semi-annual monetary
report to Congress, which Greenspan delivered to the banking committee on Tuesday, the central bank slightly reduced its forecast for growth this year.
The Fed predicted that annual growth this year would be between 4.25 and 4.75 percent, down slightly from its forecast in February that growth could reach 5 percent.
The Fed predicted that core
inflation will range between 1.5 and 2 percent next year, which is at the highest boundary of what Fed officials consider acceptable.
Though Greenspan predicted that the job market will continue to improve, the Fed predicted that the unemployment rate will decline only slightly from 5.6 percent last month to between 5 and 5.25 percent at the end of next year.
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