WASHINGTON – Federal Reserve Chairman Alan Greenspan (search) 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 a basically upbeat assessment of the economy's prospects in an appearance before Congress, saying the country had weathered a brief slowdown in the spring when iit 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 (search).
"In our view, realizing this outcome will require the Federal Reserve (search) 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.
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.
Greenspan listed three major threats to this economic outlook — the possibility that wage pressures, which have been dormant, will intensify; the threat posed by surging energy costs and the dangers posed to such sectors of the economy as housing if long-term interest rates rise significantly.
"The significant rise in purchases of homes for investment since 2001 seems to have charged some regional markets with speculative fever," Greenspan said.
He also said that the increased use of exotic types of mortgage such as interest-free mortgages were of "particular concern." He said these types of mortgages left home buyers "vulnerable to adverse events" if home prices begin to fall.
It marked Greenspan's most extensive comments on the possibility that the surge in housing prices in parts of the country could be creating a speculative bubble similar to the one on Wall Street that burst in early 2000.