WASHINGTON - The U.S. economy is continuing to charge ahead despite this year's run-up in interest rates, Federal Reserve Board chairman Alan Greenspan said yesterday.
Testifying before the congressional Joint Economic Committee, Greenspan conceded that Fed officials have been surprised by the economy's strength and remain committed to heading off higher inflation.
"This is the best economic performance that we have seen in three decades or more, and there is still no evidence of underlying deterioration in this recovery," said Greenspan.
Greenspan declined repeated requests by Republicans and Democrats on the committee to predict whether members of the Federal Open Market Committee will raise interest rates again on Dec. 20 when they meet to review monetary policy.
But the Fed chairman said U.S. gross domestic product has risen more than 4% this year, and went on to explain how policymakers believe the economy has limits to how fast it can grow before triggering higher inflation.
Yesterday afternoon, the bond market was trading lower as analysts concluded that Greenspan was laying the groundwork for additional increases in short-term rates.
"I think the central message is that the Fed is going to tighten. His was of robust growth and of things being strong," said Bruce Steinberg, head of macroeconomic analysis for Merrill Lynch & Inc. "Rather than saying what we've done is having an effect on the economy, and it is slowing, he seemed to be saying the opposite."
Fed officials would welcome the possibility that our economic performance can be in excess of historical relationships," said Greenspan. "But if we ignore experience, we would be taking unacceptable risks of higher inflation, economic and financial instability, and ultimately subpar economic performance over time. We must remain alert to signs of inflationary pressures on resources."
Some analysts have argued that the Fed is failing to take into account changes in technology, gains in productivity, foreign competition, and other factors that are containing wages and prices even while the economy expands at a robust pace. One Prominent critic using these arguments lately is Jerry Jasinowski, president of the National Association of Manufacturers.
But Greenspan said these developments "are evolutionary, working slowly and incrementally over time." Gains in productivity growth, he added, can probably increase no more than a few tenths of a percentage point annually."
Greenspan also pointed out that the increase in international trade has been taking place for a long time. Meanwhile, he argued, this year's weakness in the dollar, by raising prices of imports, "has tended to undercut any cost-containment pressures" from foreign firms competing with U.S. firms.
Greenspan's testimony did not sit well with Republican or Democratic members of the committee, who urged him to hold off on any rate increases to keep the economy from weakening. "Further increases in rates pose some risk," said Rep. Jim Saxton, R-N.J.
Sen. Paul Sarbanes, D-Md., pulled out a series of charts on inflation, interest rates, and unit labor costs to deliver a lecture to Greenspan, warning that the Fed is failing to take into account how the economy has changed. "Let's hope you're not die grinch who stole Christmas," he said.
Republicans also said they plan to consider legislation to overhaul the Humphrey-Hawkins law directing the Fed to consider employment levels and economic growth as well as inflation in setting monetary policy.
Sen. Connie Mack, R-Fla., who is in line to become chairman of the Joint Economic Committee in the 104th Congress, said he will introduce a bill that would require the Fed to focus exclusively on price stability by setting a 2% annual inflation target.
Greenspan replied that he personally favors such legislation, although he recommended not using a specific numerical target. Economists believe the consumer price index is technically flawed and overstates cost-of-living increases by half a percentage point to as much as 1.5 percentage points.
But Greenspan rejected suggestions from Democrats that the Fed system be overhauled to make it more open and accountable to the public. "I say it works for die American people, I really do," he told Sen. Byron Dorgan, N.D.
In discussing the economy, Greenspan said growth has been fueled by stronger-than-expected inventory accumulation by business, along with strong capital spending for computers and other durable goods. Gains in employment, corporate profits, and consumer confidence have also contributed to growth, he told the panel.
Greenspan also said that the credit crunch is now a thing of the past and that banks are again lending readily to businesses and consumers.
Meanwhile, the Fed said in its latest "beige book" report that economic conditions continued to strengthen around the country in November. The report win serve as a basis for deliberations by FOMC officials when they meet Dec. 20.
Most districts reported further tightening of Labor markets and rising prices of raw and intermediate goods, although the increases in prices were still not showing up much in finished goods, the report said. But for labor markets, shortages were producing rising wages in more districts than in the last report of Nov. 2, the Fed said.
The Fed also reported that consumer installment credit jumped at an annual rate of 15.8% in October following gains of 14.3% in September and 21.3% in August.
Dean Patterson contributed to this article.
