Washington, September 9-- Federal Reserve Chairman Alan Greenspan said Wednesday the U.S. economy has "regained some traction" after faltering during the second quarter, hinting strongly the central bank will raise interest rates when its top policy makers next meet Sept. 21.
But in testimony to the House Budget Committee, Mr. Greenspan implied the Fed sees no reason to accelerate the pace of "measured" interest-rate increases the Fed has pursued since June. "Despite the rise in oil prices through mid-August, inflation and inflation expectations have eased in recent months," he said in prepared statement. Business investment remains on "a solid upward trend" and the pace of job growth "picked back up in August," he said. "On the whole," Mr. Greenspan said, "the expansion has regained some traction."
The Fed has boosted the target for its federal-funds rate, the interest that banks charge on overnight loans, from a 46-year low of 1% to 1.5% in its two latest meetings, in June and August. The Fed's increases began just before economic data began to show slowing economic growth.
The U.S. gross domestic product grew just 2.8% in the second quarter, down from 4.5% in the first, and the pace of nonfarm job growth slowed to a crawl in July. But Mr. Greenspan has consistently indicated the Fed saw no reason to interrupt its campaign of rate increases, saying the economic slowdown was a mere "soft patch."
Wall Street, as a result, widely expects the central bank to raise the funds rate by another quarter percentage point on Sept. 21. In his testimony Wednesday, Mr. Greenspan validated expectations of a small rate increase by asserting that inflation appears tame in the near term. Indeed, after the release of his prepared testimony, trading in federal-funds futures suggested that the market sees a 100% likelihood that the Fed will raise rates another quarter point in two weeks.
To be sure, unit labor costs rose in the second quarter as productivity growth slowed from its extraordinary pace of the past two years and employee compensation per hour remained on an upward trend," Mr. Greenspan said. But "increases in nonoil import prices have lessened -- a development that ... has helped to lower core consumer-price inflation in recent months."
Still, Mr. Greenspan warned of an "uncertain" outlook for oil prices in the long term. Although crude-oil prices have "come off their highs of mid-August," he said, "growing concerns about long-term supply, along with large prospective increases in demand from the rapidly growing economies of China and India ... have propelled prices of distant futures to levels well above their ranges of recent years."
"Future balances between supply and demand will remain precarious, and incentives for oil consumers in developed economies to decrease the oil intensity of their economies will doubtless continue," he said. "Presumably similar developments will emerge in the large oil-consuming developing economies."
Mr. Greenspan also warned U.S. lawmakers that the long-term outlook for the federal budget is "troubling," despite the likelihood that the record deficit racked up this year will decline next year as the economy improves.
"With the baby boomers starting to retire in a few years and health spending continuing to soar, our budget position will almost surely deteriorate in coming years if current policies remain in place," Mr. Greenspan said, echoing warnings he has given before.
