Greenspan signals further rate increases

WASHINGTON -- Federal Reserve chairman Alan Green-span said Wednesday the U.S. economy should produce sustained growth with low inflation in coming months and this will mean continued gradual interest rate increases by the central bank.

Greenspan delivered an upbeat assessment of the economy's prospects in an appearance before Congress, saying the country weathered a brief slowdown in the spring when inflation appeared to be on the rise.

And he made clear in his final midyear economic report to lawmakers that the Federal Reserve Board would continue raising interest rates at the same gradual pace it has for the past year.

"Our baseline outlook for the U.S. economy is one of sustained economic growth and contained inflation pressures," he said in testimony before the House Financial Services Committee.

"In our view, realizing this outcome will require the Federal Reserve to continue to remove monetary accommodation," Greenspan said, referring to the Fed's string of credit tightening moves over the past year.

The Fed has pushed the federal funds rate, the overnight borrowing rate for commercial banks, from a 46-year low of 1 percent in June 2004 to its current level of 3.25 percent in a series of quarter-point moves.

Greenspan's comments make a 10th quarter-point move at the Fed's next meeting in August a virtual certainty.

During the question period, Greenspan received extensive praise for the job he has done at the Fed for the past 18 years. Rep. Brad Sherman, D-Calif., said he was introducing a bill that would allow Greenspan to serve for another five years, removing the current requirement that will force Greenspan off the Fed board next Jan. 31.

"Does my wife have a vote on this?" Greenspan joked, referring to NBC news reporter Andrea Mitchell.

Greenspan said he felt legislation pending in the House that would tighten regulation of government-sponsored Fannie Mae and Freddie Mac was seriously flawed.

He said any measure passed by Congress needed to contain provisions that would restrain the growth of the financial holdings of the two mortgage giants and noted the House proposal failed to do this. He said such limits were needed to protect the overall financial system from excessive risks.

Greenspan repeated his support for President Bush's effort to create private savings accounts as part of an overhaul of Social Security, a proposal that has met strong resistance from Democrats in Congress.

Greenspan said that in the past two months growth has strengthened and inflation pressures have abated somewhat after rising oil prices and a slowdown in business activity had made the upbeat economic outlook "cloudier this spring."

In its new economic forecast, the Fed said the economy should grow by 3.5 percent. That is down slightly from its previous estimate, made in February, of 3.75 percent to 4 percent.

Greenspan listed three major threats to this economic outlook -- the possibility that wage pressures, which have been dormant, will intensify; the threat posed by surging energy costs and the dangers posed to such sectors of the economy as housing if long-term interest rates rise significantly.

"The significant rise in purchases of homes for investment since 2001 seems to have charged some regional markets with speculative fever," Greenspan said.

He also said that the increased use of exotic types of mortgage such as interest-only mortgages were of "particular concern." He said these types of mortgages left home buyers "vulnerable to adverse events" if home prices begin to fall.

It marked Greenspan's most extensive comments on the possibility that the surge in housing prices in parts of the country could be creating a speculative bubble similar to the one on Wall Street that burst in early 2000.

Greenspan said that if energy costs, which earlier this month surged to a record closing high of more than $61 per barrel, don't rise any more,then the Fed's forecasts of sustained growth will not be threatened.

The Fed chairman said previously that the rise in energy costs since late 2003 will shave about three-fourth of a percentage point from growth this year, according to Fed staff estimates.

While the new Fed forecast showed slightly lower growth this year, it estimated that inflation, excluding energy and food, would increase by around 1.75 percent to 2 percent this year. This was up slightly from the February estimate of 1.5 percent to 1.75 percent increase in core inflation.

The outlook for employment improved slightly to show the jobless rate falling to 5 percent at the end of this year compared to the February forecast of a dip to 5.25 percent. The jobless rate currently is at 5 percent.

Greenspan, who has delivered economic forecasts to Congress twice a year for the past 18 years, was delivering his last such briefing this week. He has said he will retire from the Fed when his term as Fed board member ends on Jan. 31 of next year.