Federal Reserve Board Chairman Alan Greenspan said Tuesday that the central bank would raise interest rates if the economy does not slow down in the second half of the year.
"I am confident that the Federal Open Market Committee would move to tighten reserve market conditions, should the weight of incoming evidence persuasively suggest an oncoming intensification of inflation pressure that would jeopardize the durability of the economic expansion," Mr. Greenspan told a House banking subcommittee.
He said the economy grew 2.25% in the first half of the year while the core inflation rate was 2.8%.
Interpreting Mr. Greenspan's remarks is always tricky. But Bert Ely, an industry consultant with Ely & Co., said the Fed chairman was sending an unusually clear signal that the Federal Open Market Committee would raise short-term rates at its Aug. 20 meeting.
"This suggests he's ready to put his foot on the brake a lot faster than most expect," said Mr. Ely, who attended the hearing.
This was Mr. Greenspan's second to trip to Capitol Hill in a week. He reported on the economy to the Senate last Wednesday.
Mr. Greenspan repeatedly noted that labor markets remain tight. Currently workers aren't demanding higher wages, he said, but that won't last.
Wage growth would spur inflation unless it is accompanied by a corresponding rise in productivity, Mr. Greenspan said.
Controlling inflation is key to a strong economic future, he stressed.
"Whatever the long-run potential for sustainable growth, we believe that a necessary condition for achieving it is low inflation," Mr. Greenspan told House Banking's domestic and international policy subcommittee. "As a consequence, the Federal Reserve remains committed to preventing a sustained pickup in inflation and ultimately in achieving price stability."
During a question-and-answer period with lawmakers, Mr. Greenspan praised efforts to tackle the explosive growth of entitlement programs.
"It is no longer the third rail of American politics," he said. "The electrical power has been turned off."
He also urged lawmakers not to be discouraged if their work doesn't produce immediate results. He said the nation needs to reach a consensus before any legislative effort can succeed.
Mr. Greenspan also said investors should not overreact to last week's wild swing in stock prices. Much of the turbulence was caused by technology stocks, which by nature are volatile, he said.