Alan Greenspan, the
chairman, acknowledged Thursday that several key areas of the U.S. economy were showing signs of slowing from their heated pace of last year and early this year.
But Greenspan also said growth might accelerate again, leading to renewed efforts by the central bank to raise interest rates to slow economic growth to a sustainable level.
"The growth in household spending has slowed noticeably this spring from the unusually rapid pace observed late in 1999 and early this year," Greenspan said in his semiannual testimony before the Senate Banking Committee. But he noted that "we cannot yet be sure that the slower expansion of domestic final demand, at a pace more in line with potential supply, will persist."
The Fed has raised short-term interest rates six times in the past year in an attempt make it more costly for consumers and businesses to borrow and spend. By slowing spending, the Fed hoped to put supply and demand back into balance, reducing the risk of inflation that occurs when too many dollars chase a steady amount of goods. At its most recent meeting in June, the Fed's policymaking committee decided to keep interest rates steady because of slower
housing markets and other key areas of the economy.
In his testimony Thursday, Greenspan maintained a tough, vigilant stance on inflation, but the overall tone of his testimony, compared to his last address to Congress in February, was decidedly more optimistic that elements of the recent slowing of economic growth might remain.
Financial markets reacted positively to Greenspan's testimony, even though he left open the possibility that rates may rise further later in the year. In midday trading Thursday, the Dow Jones Industrial Average was 131 points higher at 10827, while the Nasdaq Composite Index was up 108 at 4163.
Greenspan noted that some factors in the recent slowdown in economic demand -- including higher household debt, the near-saturation of consumers' appetite for long-lasting durable goods like automobiles and appliances, and flattening stock prices -- might continue to act as a drag on economic growth, reducing the risk of inflation.
Higher oil prices, he said, "is another likely source of the slowed growth in real consumption outlays in recent months, though one that may prove to be largely transitory."
Greenspan reiterated his recent
acknowledgement that worker productivity, which provides the basis for an economic expansion without inflation, might continue to
grow, even if the economy runs at a slower pace.
Some analysts have said that the productivity gains in recent years are merely a byproduct of increased demands on businesses and workers. But, Greenspan said, "so far there is little evidence to undermine the notion that most of the productivity increase of recent years has been structural," suggesting that productivity growth might now be a integral part of the economy rather than a temporary phenomenon.
Greenspan said, however, that risks to the economy still exist as the nation remains near full employment and as the current account deficit and trade deficit with foreign nations continue to surge to new levels.
"There are limits to how far net imports -- or the broader measure, our current account deficit -- can rise, or our pool of unemployed labor resources can fall," Greenspan said.
Even though the unemployment rate is currently hovering around a historically low 4%, leading some economists to fear that businesses will raise their prices to pay for higher wages, Greeenspan said productivity growth is continuing to keep wage pressure under control.
"Despite the ever-tightening labor market, as yet gains in compensation per hour are not significantly outstripping gains in productivity," Greenspan said.
But he cautioned that "should labor markets continue to tighten, short of a repeal of the law of supply and demand, labor costs eventually would have to accelerate to levels threatening price stability and our continuing economic expansion."
The large current account deficit, a broad measure of international flows of goods and investments, is also a sore spot for the economy, Greenspan said, because it highlights the continuing imbalance between domestic supply and demand. However, he noted that most of the dollars that the United States spends on foreign goods have been returning to the nation because of foreign purchases of stocks and Treasury bonds. That has largely shored the value of the U.S. dollar versus other currencies, mitigating the ill economic effects of the current account deficit.
"So long as foreigners continue to seek to hold ever-increasing quantities of dollar investments in their portfolios, as they obviously have been, the exchange rate for the dollar will remain firm," Greenspan said.