- WASHINGTON (AP) -- Federal
Reserve Chairman Alan Greenspan said Wednesday "impressive gains"
in the U.S. economy since last summer should lead to improvements in the
lagging jobs market, but warned that soaring budget deficits pose a risk
to longer-term business prospects.
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- In delivering the Fed's monetary report to Congress,
Greenspan repeated the central bank's recent pledge to be "patient"
in keeping interest rates at a 45-year low to ensure that the economic
rebound takes hold.
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- However, he cautioned that such low interest rates "will
not be compatible indefinitely" with the Fed's primary job of fighting
inflation.
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- Financial markets tumbled in late January after the Fed
dropped a promise it had been making since August ó to keep rates
low "for a considerable period" ó and replaced that phrase
with the pledge to be "patient" before raising rates. However,
markets were bolstered by Greenspan's new testimony with traders believing
it showed the central bank was still in no hurry to start raising interest
rates.
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- Testifying before the House Financial Services Committee,
Greenspan delivered a generally upbeat outlook saying the economy's prospects
had "brightened" since his last monetary report in July. He said
conditions had been helped by a reduction in geopolitical tensions, strengthened
consumer and business confidence and a sharp rebound in economic growth
as measured by the gross domestic product.
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- "Overall, the economy has made impressive gains
in output and real incomes; however progress in creating jobs has been
limited," Greenspan told the committee.
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- But even in the jobs area, Greenspan held out hopes for
an improvement in coming months as continued strong GDP growth makes businesses
more confident about hiring back laid-off workers.
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- "As managers become more confident in the durability
of the expansion, firms will surely once again add to their payrolls,"
Greenspan said.
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- But he said the optimism could turn out to be misplaced
if any of a number of risks derail the economy's prospects. Among the risks
he listed were a sharp increase in oil and natural gas prices and the possibility
that investors will become spooked by the soaring budget deficit. Last
week, the administration projected that this year's deficit will hit an
all-time high in dollar terms of $521 billion.
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- "Should investors become significantly more doubtful
that the Congress will take the necessary fiscal measures, an appreciable
backup in long-term interest rates is possible," said Greenspan. That
view is at odds with the Bush administration, which has argued that the
deficits pose no immediate threat of pushing interest rates higher.
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- Greenspan devoted a considerable part of his testimony
to urging Congress to get control of the soaring deficits, which the administration
is pledging to cut in half over the next five years.
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- Greenspan said the need to start taking action is critical
in light of the country's soaring current account trade deficit, which
hit $550 billion last year, requiring the United States to borrow that
amount from foreigners during a period when the dollar is weakening in
value.
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- "Given the already substantial accumulation of dollar-denominated
debt, foreign investors, both private and official, may become less willing
to absorb ever-growing claims on U.S. residents," Greenspan said.
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- Many private economists are concerned that if foreigners
suddenly become spooked and start dumping their U.S. holdings, stock prices
could plunge and interest rates soar.
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- Greenspan's testimony was accompanied by a new Fed forecast
for 2004 that was moderately more optimistic about the economy than the
July forecast had been.
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- The new forecast predicted the GDP will grow by between
4.5 percent and 5 percent in 2004, up from a July forecast that had pegged
2004 growth at between 3.75 percent and 4.75 percent.
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- The Fed predicted that the unemployment rate, which dropped
in January to 5.6 percent, would show a slight improvement this year, edging
down to be 5.25 percent and 5.5 percent by the fourth quarter. The Fed
projected that inflation will remain under control with an inflation gauge
tied to the GDP rising by just 1 percent to 1.25 percent this year, around
the level that the Fed considers as representing price stability.
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of The Associated Press.
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