Greenspan cites worry on inflation

January 26, 1995|By New York Times News Service

WASHINGTON -- Giving the strong impression that the Federal Reserve has not yet finished raising short-term interest rates, Alan Greenspan told Congress yesterday that several harbingers of revived inflation required the Fed to remain "vigilant."

In an appearance before the Senate Finance Committee, Mr. Greenspan, the Fed's chairman, avoided direct comment on the central bank's policy-making meeting next week.

But in comments that echoed those of other Federal Reserve officials in recent days, Mr. Greenspan clearly implied that the economy remained too robust to count higher inflation out.

Tightness in the labor market and other strains on the economy could "lead to some deterioration in the price picture in the near term," Mr. Greenspan said, "but any such deterioration should be contained if the Federal Reserve remains vigilant."

The Fed has raised rates six times since February in its effort to prevent what it views as a runaway economic expansion surpassing 4 percent annual growth from causing prices to rise.

By gradually raising interest rates, the central bank hopes to squeeze consumer and business borrowing enough to slow the economy's growth to a more sustainable pace of roughly 2.5 percent.

But the danger is that the Fed may be overreacting and could topple the economy into another recession by tightening its monetary grip too much.

Even though inflation has been running at less than 3 percent for three straight years -- the best record since the early 1960s -- the Fed is worried that the economy has been too strong recently for its own good.

"I see it as crucial that we extend the recent trend of low and, hopefully, declining inflation in the years ahead," Mr. Greenspan added. While the prospects are "fundamentally good," there are grounds for "some concern."

Mr. Greenspan cited, for example, the fact that the unemployment rate had fallen to 5.4 percent. While consumer prices and the prices of goods going out the factory door have barely budged, he said, the costs of parts and supplies at earlier stages of production were starting to accelerate.

Mr. Greenspan also used the occasion to lecture Congress about the risks of widening the federal budget gap, saying the budget deficit is the nation's No. 1 economic problem.

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