Rates might need to go up, Greenspan tells senators

Fed chief finds himself drawn into argument about tax policy

Monetary policy

July 29, 1999|By BLOOMBERG NEWS

WASHINGTON -- Federal Reserve policy-makers might raise interest rates again because the U.S. economy could be growing too quickly, raising the risk that inflation is likely to accelerate, Fed Chairman Alan Greenspan told the Senate Banking Committee yesterday in the second of his semiannual reports on the economy and monetary policy.

Greenspan, however, offered little elaboration on his warning -- identical to one he gave the House Banking Committee last week -- because senators were more interested in dragging the central bank head into an argument over tax policy.

The Senate is debating a Republican-sponsored $792 billion tax-cut bill opposed by President Clinton and most congressional Democrats.

During the question-and-answer portion of yesterday's hearing, both sides sought to enlist Greenspan's support, and he offered something for both.

"We probably would be better off holding off on a tax cut immediately, largely because of the fact that it is apparent that the surpluses are doing a great deal of positive good to the economy," Greenspan said.

He was quick to add, though, "that if what is occurring is an effort to build up irrevocable spending programs financed by a surplus that is dubious is the worst of all circumstances."

In the text of his remarks, Greenspan again warned that the Fed is prepared to act "pre-emptively" should there be signs that inflation might accelerate. And he again suggested that one such sign might be another drop in the unemployment rate, currently 4.3 percent.

Nevertheless, the Fed chairman said the central bank does not target a particular employment rate, even though the Full Employment and Balanced Growth Act of 1978 calls for unemployment no higher than 4 percent.

That's a national policy goal, not a Fed requirement, Greenspan said.

"What we try to do is get maximum sustainable growth, which is what our policy is, and what unemployment rate falls out as a consequence of that policy in my judgment would be the appropriate unemployment rate," Greenspan said.

The decline in oil prices over the past two years "had a fairly pronounced effect" in holding down inflation, Greenspan said. Yet, while prices have risen from a low of $12 a barrel in mid-February to more than $20 a barrel now, "the impact is far less" than it was in previous decades, he said.

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