Federal Reserve Board Chairman Alan Greenspan gave the economy a strong report card Tuesday, though he said policymakers are worried about overvalued equity markets, mounting debt, global financial stability, and tight labor markets.
"The economy appears stretched in a number of dimensions, implying considerable upside and downside risks to the economic outlook," Mr. Greenspan said in the first of two days of monetary policy testimony on Capitol Hill.
But "the economy evidently retains a great deal of underlying momentum despite the global economic problems and the still-visible remnants of the earlier financial turmoil in the United States," Mr. Greenspan told the Senate Banking Committee. "At the same time, no evidence of any upturn in inflation has, as yet, surfaced."
The remarks left economists convinced that the Fed, though ready to act, does not plan to change short-term interest rates any time soon.
"He basically said the Fed has to remain vigilant but did not give any indication of an imminent shift in monetary policy," said Nicholas Perna, chief economist at Fleet Financial Group.
"They are going to have to see some actual increases in the leading indicators of inflation before they raise rates," said Wayne M. Ayers, chief economist at BankBoston and chairman of the American Bankers Association's Economic Advisory Council. "They have effectively abandoned their preemptive strategy and are waiting to see the whites of their eyes before they act against inflation."
Sung Won Sohn, chief economist at Wells Fargo & Co., said the central bank will leave the Fed fund rate unchanged at the March 30 Federal Open Market Committee meeting but may raise it at the May 18 meeting. "Assuming the global economic situation does not flare up, there is a greater probability of higher interest rates than lower rates," he said.
The economy should grow by 2.5% to 3% this year, down from 4% growth last year, Mr. Greenspan said. He is expected to give nearly identical testimony today to the House Banking Committee. Inflation will rise to 2% to 2.5%, up from 1.6% last year, he said.
Mr. Greenspan surprised some economists when he implied that the Fed should not have cut rates a third time in the fall. "The Federal Reserve must continue to evaluate, among other issues, whether the full extent of the policy easings taken last fall to address the seizing up of financial markets remains appropriate," he said.
Mr. Greenspan was particularly concerned about corporate earnings. If profits fail to meet Wall Street expectations, he said, stock prices could tumble. That could slow capital spending, which would dampen future growth. "In addition, a stock market decline would tend to restrain consumption spending through its effect on household net worth," he said.