WASHINGTON - Signaling future interest rate hikes, Federal Reserve Board Chairman Alan Greenspan told the Senate Banking Committee Wednesday that the war on inflation is not yet over.
"The prospects in this regard are fundamentally good, but there are reasons for some concern, at least with respect to the near term," Mr. Greenspan said.
Economic data indicate that the economy cannot expand much more without encountering inflation, he said, noting that factories are near capacity, supply shipments are taking longer, and unemployment is low.
"We must remember that the nation entered 1995 with its resources stretched," Mr. Greenspan said. "We do not have the substantial unused capacity that made possible the especially favorable macroeconomic outcomes of 1993 and 1994."
He acknowledged, however, that the Fed could be wrong. If inflation does not appear, the Fed could cut rates. "We need to be flexible," he said, "to be willing to adjust our stance."
Eugene Sherman, an analyst with M.A. Schapiro & Co., said he expects the Fed to raise rates this spring or summer.
"He acknowledges that inflation, before it moves lower, will move higher," Mr. Sherman said.
Mr. Greenspan also tackled several other issues during his semiannual report to Congress on monetary policy, also known as the Humphrey-Hawkins hearings.
He encouraged Sens. Connie Mack, R-Fla., and Robert Bennett, R-Utah, who want to amend the Federal Reserve Act so the central bank no longer must consider how its decisions will affect employment rates.
"In my judgment, that is something that will be helpful," Mr. Greenspan said.
He also reiterated his call on Congress to cut the deficit, saying this takes priority over reducing taxes. Congress could help itself cut the deficit if it required a supermajority for all spending votes, he said.
Finally, he urged Congress to institute "sunset" provisions, under which each law and agency, including the Fed, would expire after a certain number of years unless lawmakers explicitly voted for reauthorization.