- WASHINGTON (Reuters) -- The
U.S. economy has entered a period of more vigorous expansion that may require
higher interest rates to keep inflation from rearing its head, Federal
Reserve Chairman Alan Greenspan said on Wednesday.
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- "As I have noted previously, the federal funds rate
must rise at some point to prevent pressures on price inflation from eventually
emerging," Greenspan said in testimony prepared for Congress's Joint
Economic Committee.
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- "As yet, the protracted period of monetary accommodation
has not fostered an environment in which broad-based inflation pressures
appear to be building," he said. "But the Federal Reserve recognizes
that sustained prosperity requires the maintenance of price stability and
will act, as necessary, to ensure that outcome."
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- His words helped feed a conviction in financial markets
that the U.S. central bank will raise interest rates this year, perhaps
as early as this summer.
-
- On Tuesday, Greenspan sent stock and bond markets lower
when he foreshadowed his optimistic assessment of the economy by telling
a Senate banking panel that businesses were regaining their ability to
make price rises stick.
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- "One always has to focus on what is not said as
well as with what is said. I don't see any hints saying the Fed can be
patient. That language seems to be dropped from what I see," said
Alan Ruskin, research director at 4CAST Ltd. in New York.
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- "That's crucial. The Fed feels that tightening is
not too far (off). It may not be in June, but it could be in an August
time frame," he added.
-
- The Fed chief said a stretch of disinflation, or slowing
inflation rates, now seems to be over but high rates of labor productivity
growth and unused economic capacity were restraining upward prices pressures
"and should continue to do so for a time."
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- For a second straight day, Greenspan sounded an upbeat
note about the strength and durability of the economic expansion.
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- He said that after a long period of weakness, conditions
appeared to be improving in the nation's labor markets with companies evidently
more willing to take on employees.
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- "Looking forward, the prospects for sustaining solid
economic growth in the period ahead are good," the Fed chief said,
noting that interest-rate policy remained "quite accommodative"
and fiscal policy was helping power consumer spending.
-
- "Importantly, the caution among business executives
that had previously led them to limit their capital expenditures appears
to be giving way to a growing confidence in the durability of the expansion,"
the Fed chairman said.
-
- Greenspan has consistently maintained that an improvement
in business confidence was needed to spark and sustain a healthy economic
recovery.
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