Federal Reserve Chairman Alan Greenspan said the US economy had been showing "impressive gains," even as he warned that mushrooming federal budget deficits could derail the progress.
Despite Greenspan's deficit comments on Wednesday, which put him at odds with the Bush administration, he offered an upbeat assessment of the economy and expressed hope companies would step up hiring. Hiring has been painfully slow and has become a political sore spot for US President George W. Bush.
PHOTO: AFP
The central bank chairman's twice-a-year economic report to Congress apparently pleased Wall Street. The Dow Jones industrials jumped 123.85 points to close at 10,737.70 -- the highest level in more than 2 1/2 years.
Greenspan reaffirmed the Fed's stance that it would be patient in considering possible increases in short-term interest rates, which now are at a 45-year low of 1 percent.
Greenspan said the economic picture has brightened since summer. The economy grew at an average rate of 6.1 percent in the second half of last year, the fastest back-to-back quarterly increases since the first two quarters of 1984.
"Overall, the economy has made impressive gains in output and real incomes; however progress in creating jobs has been limited," he told the committee.
Greenspan held out hopes for improvement as businesses, unable to squeeze more out of existing workers, begin hiring to meet increased demand.
"As managers become more confident in the durability of the expansion, firms will surely once again add to their payrolls," Greenspan said.
He tempered his optimism with a dose of caution about the dangers of budget deficits.
Last week, the Bush administration projected that this year's deficit will reach a record US$521 billion.
"Federal budget deficits could cause difficulties even in the relatively near term," Greenspan told the House Financial Services Committee.
He said that unless the government gets its financial house in order, the situation will grow more dire with the impending retirement of 77 million baby boomers.
"Without corrective action, this development will put substantial pressure on our ability in coming years to provide even minimal government services while maintaining entitlement benefits at their current level without debilitating increases in tax rates," he said.
The Fed's economic forecast predicted that the unemployment rate, which dropped in January to 5.6 percent, would improve slightly, edging down to somewhere between 5.25 percent and 5.5 percent by the fourth quarter.
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