WASHINGTON - Federal Reserve Board Chairman Alan Greenspan Wednesday signaled that the central bank may raise interest rates for the seventh time in 12 months when its policy-making committee meets next week.
Mr. Greenspan, testifying before the Senate Finance Committee, said the Fed will not to allow wage and price escalations to ignite inflation.
"I see it as crucial that we extend the recent trend of low, and hopefully declining, inflation in the years ahead," Mr. Greenspan said. "The prospects in this regard are fundamentally good, but there are reasons for some concern, at least with respect to the nearer term."
Mr. Greenspan said factories are nearing capacity, and unemployment has dropped to a recent low. Also, anecdotal evidence suggests that shortages in raw materials and qualified employees are starting to appear.
The last time these events occurred, during the late 1980s, wages and prices accelerated appreciably, he said.
Mr. Greenspan laid some of the responsibility for fighting inflation on Congress, which he said must bring the deficit under control.
"That is the No. 1 priority for fiscal stability," Mr. Greenspan said.
Tax cuts should occur after lawmakers have attacked the deficit, he said. "If we cut spending enough, there is room to cut taxes," Mr. Greenspan said in response to a question from Sen. John Chafee, R-R.I.
Sen. Bill Bradley, D-N.J., asked if Congress would damage future deficit reduction by cutting infrastructure and education programs now. Mr. Greenspan said economists are divided on that question, noting that it is nearly impossible to determine the economic benefit of those types of investments.
Mr. Greenspan, in response to a question from Sen. Bob Packwood, R-Ore., urged Congress to raise the Social Security retirement age. He said lawmakers must stabilize the average number of years a recipient receives benefits if they want to bring the program into balance.
The Fed chairman also reiterated an earlier call from Congress to re- examine the cost-of-living adjustments made on social security and other entitlement payments. He said the government could save $150 billion over five years if these adjustments more accurately reflect the true inflation rate.