ICS Magazine

Greenspan Signals Further Rate Increases

July 20, 2005
WASHINGTON -(AP)- Federal Reserve Chairman Alan Greenspan said Wednesday the economy should enjoy sustained growth with low inflation in coming months, a strong condition that will require continuing incremental increases in interest rates.

Greenspan delivered an upbeat assessment of the economy's prospects in an appearance before Congress, saying the country weathered a brief slowdown in the spring when inflation appeared to be on the rise.

And he made clear in his final midyear economic report to lawmakers that the Federal Reserve Board would continue raising interest rates at the same gradual pace it has for the past year.

"Our baseline outlook for the U.S. economy is one of sustained economic growth and contained inflation pressures," he said in testimony before the House Financial Services Committee.

"In our view, realizing this outcome will require the Federal Reserve to continue to remove monetary accommodation," Greenspan said, referring to the Fed's string of credit tightening moves over the past year.

The Fed has pushed the federal funds rate, the overnight borrowing rate for commercial banks, from a 46-year low of 1 percent in June 2004 to its current level of 3.25 percent in a series of quarter-point moves.

Greenspan's comments make a 10th quarter-point move at the Fed's next meeting in August a virtual certainty.

During the question period, Greenspan repeated his support for President Bush's effort to create private savings accounts as part of an overhaul of Social Security, a proposal that has met strong resistance from Democrats in Congress.

Greenspan said the private accounts would be part of a wide range of private savings that will be needed to bridge a substantial gap between the amount of pre-retirement income Social Security will be able to replace and the amount that retirees will need "to maintain a reasonable standard of living."

Greenspan said that in the past two months growth has strengthened and inflation pressures have abated somewhat after rising oil prices and a slowdown in business activity had made the upbeat economic outlook "cloudier this spring."

In its new economic forecast, the Fed said the economy should grow by 3.5 percent. That is down slightly from its previous estimate, made in February, of 3.75 percent to 4 percent.