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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," Alan Greenspan told Congress Wednesday.
updated 4/21/2004 11:55:02 AM ET 2004-04-21T15:55:02

Federal Reserve Chairman Alan Greenspan told Congress on Wednesday that America’s economic recovery has good momentum and that low, short-term interest rates will have to rise at some point, though he didn’t say when.

“Looking forward, the prospects for sustaining solid economic growth in the period ahead are good,” Greenspan said in prepared testimony to the Joint Economic Committee.

Greenspan, in striking an upbeat tone about the economy, noted a much-awaited improvement in the hiring climate after a long period in which an uneven economic recovery had failed to produce significant increases in the nation’s payrolls.

The economy added 308,000 jobs in March — the most in four years. That raised hopes among private economists that the labor market was turning a crucial corner.

But with the rebound in the economy, some companies are finding it easier to raise their prices, Greenspan said. He also noted that the fall in the value of the U.S. dollar and a strengthening global economy were adding to pricing pressures at home.

While stressing that inflation currently remains low, he said it was the job of the Federal Reserve to be stay on the alert for an unwelcome flare-up in inflation.

“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. “As yet, the protracted period of monetary accommodation has not fostered an environment in which broad based inflation pressures appear to be building.”

Greenspan’s optimistic remarks on the U.S. economy come as the International Monetary Fund predicted that the global economy should grow strongly this year with growth in the United States hitting 4.6 percent — the fastest pace in 20 years.

The IMF estimated that the global economy would also expand by a brisk 4.6 percent this year, up from a 3.9 percent increase last year.

In response to questions from committee members, Greenspan said he felt that a sweeping change in corporate taxes proposed by presumptive Democratic nominee John Kerry would not have much impact either in preventing the migration of U.S. jobs to other countries or boosting investment by U.S. businesses in this country.

Kerry has proposed eliminating a benefit U.S. companies have in being able to defer taxes on the operations of their overseas subsidiaries until profits from the overseas operations are brought back to the United States.

Greenspan also said he felt it would be a “bad mistake” for Congress to block a proposal by the Financial Accounting Standards Board to require publicly held businesses to treat stock options as an expense.

Since last June, Greenspan and his colleagues have held the federal funds rate — a key short-term interest rate — at 1 percent, the lowest since 1958. Most economists believe the Fed will leave rates at that level at its next meeting on May 4.

Beyond that, economists have differing opinions on when interest rates will start going up. Some economists predict the Fed will begin to push rates higher later this year. But others believe rates might stay where they are into 2005.

Greenspan’s comments marked the second signal in two days that the Fed was beginning to edge closer to raising interest rates. Greenspan’s remarks before the Senate Banking Committee on Tuesday sent stocks tumbling as Wall Street investors feared a rate increase would come sooner rather than later.

Major Market Indices

“The Federal Reserve recognizes that sustained prosperity requires the maintenance of price stability and will act, as necessary, to ensure that outcome,” Greenspan said in his testimony Wednesday.

As he did on Tuesday, Greenspan noted that deflation — a prolonged and widespread decline in prices — was no longer a concern as it was this time last year.

But at the same time, inflation for the most part remained tame, especially in the all-important area of wages, Greenspan said. He attributed this in large part to the long period of weak job creation the economy has endured.

Even with a pickup in hiring in recent months, the average duration of unemployment in March was 20 weeks — nearly double the 12 weeks of September 2000.

Greenspan said that while he believed wages — which account for two-thirds of a company’s production costs — will start rising as job growth accelerates. But he didn’t believe this would set off inflation problems because companies could meet higher payroll costs through higher profits.

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