WASHINGTON – Federal Reserve Chairman Alan Greenspan on Wednesday delivered to Congress an upbeat assessment of the U.S. economy, but he called on lawmakers to help bolster U.S. prosperity by restraining the growth of the federal budget deficit.
Greenspan, presenting the Fed’s semiannual report to Congress, signaled that the central bank will continue to raise its key short-term interest rate in the months ahead. But he said nothing in his prepared remarks about how far or how fast the Fed will lift the rate.
Greenspan also offered no comment on President Bush’s budget plan or his proposal to alter Social Security, although the Fed chairman was questioned on both during Wednesday’s Senate Banking Committee hearing.
He did say that it was “imperative to restore fiscal discipline.” The budget deficit grew to a record $413 billion in 2004 and is projected to expand rapidly in future years as the baby boom generation retires and starts collecting Social Security benefits. Greenspan has previously urged Congress to limit the growth of Social Security benefits for future retirees, warning that the country has promised more in benefits than it can deliver.
“Benefits promised to a burgeoning retirement-age population under mandatory entitlement programs, most notably Social Security and Medicare, threaten to strain the resources of the working-age population in the years ahead,” he said Wednesday.
“Real progress on these issues will unavoidably entail many difficult choices. But the demographics are inexorable, and call for action before the leading edge of baby boom retirement becomes evident in 2008.”
Greenspan warned that failure to address these issues could raise long-term interest rates.
For now, interest rates and inflation remain relatively low, and the economy is growing nicely.
“All told, the economy seems to have entered 2005 expanding at a reasonably good pace, with inflation and inflation expectations well anchored. On the whole, financial markets appear to share this view,” he said.
The Fed raised its key rate, the federal funds rate, to 2.5 percent at its meeting earlier this month. That was the sixth quarter-percentage-point increase since June, when the rate stood at an unusually low 1 percent.
Greenspan said the Fed has “significantly” lifted the rate during that time, “but by most measures, it remains fairly low.” That observation, coupled with his subsequent remarks on inflation risk, indicated that the rate will continue to rise.
But he omitted any reference to the likely pace of future increases, dropping his previous public references to a “measured” pace of increases.
“Measured” has meant raising the rate in a series of small steps over many months. Dropping it in his remarks does not necessarily mean the Fed will switch to a more aggressive approach. Rather, it indicates that Fed policymakers are less willing to comment on their likely future actions.
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