In a possible signal the Federal Reserve will raise interest rates again, Chairman Alan Greenspan cautioned Wednesday that the economy is growing too rapidly.
Greenspan told the Senate Finance Committee it’s clear the economy expanded at about a 4 percent rate last year, the fastest in a decade and appreciably above its capacity to grow without inflation worsening.
Although consumer prices have risen less than 3 percent for three years running - the best showing since the early 1960s - “there are reasons for some concern, at least with respect to the nearer term,” he said.
And he used the evidence for that concern to underscore the need to reduce the budget deficit as Republicans and Democrats compete to offer multibillion-dollar tax cuts.
“History is replete with examples of fiscal pressures leading to monetary excesses and then to greater inflation,” he said.
Private economists said Greenspan’s comments sounded like he was leaving the door open to the seventh increase in short-term interest rates in a year.
“He’s fending off those who would try to oppose tightening,” said economist Robert G. Dederick of Northern Trust Co. in Chicago.
Economist David Jones of Aubrey G. Lanston & Co. said the next move - probably a half-percentage-point increase - could come soon after Fed policy-makers’ next meeting on Jan. 31-Feb. 1.
However, he said Greenspan’s discussion of economic variables leaves the Fed’s course after that uncertain.
“The odds still favor a tightening move at the next meeting, but after that there may be a prolonged pause on the part of the Fed as it waits for evidence with regard to how much its earlier tightening steps have slowed the economy,” Jones said.
During 1994, Fed policy-makers pushed the benchmark rate charged on interbank loans from 3 percent to 5.5 percent
Among the inflation risks cited by Greenspan were reports of worker shortages, supply bottlenecks in manufacturing and a sharp rise in raw material prices.
Offsetting that are lingering uncertainty over job security, which has kept a lid on wages, and continuing price competition among manufacturers, Greenspan said. But he warned those disciplines may fade as pressures on labor and raw materials persist.
“It may be … (there will be) some deterioration in the price picture in the near term; but any such deterioration should be contained if the Federal Reserve remains vigilant.”
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