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Greenspan Claims Economy Likely to Continue on Track

By John M. Berry
The Washington Post

Federal Reserve officials expect the U.S. economy's current favorable combination of moderate growth, low unemployment and low inflation to continue at least through the end of next year, Fed Chairman Alan Greenspan told Congress on Tuesday.

Greenspan's prediction fueled another explosive rally in the stock and bond markets. The Dow Jones industrial average gained 154.93 points to close at a record 8,061.65, a 2 percent gain.

Financial analysts took Greenspan's testimony before a House Banking subcommittee as an indication that central bank policymakers see no need to raise short-term interest rates any time soon to keep inflation under control.

"The recent performance of the economy, characterized by strong growth and low inflation, has been exceptional, and better than most anticipated," he told the committee. Moreover, Fed surveys of economic conditions have found that "economic activity is on the rise, and at a relatively high level, in virtually every geographic region and community of the nation."

However, Greenspan sounded a typically cautious note when he said it is not certain yet that economic growth, which ran at a torrid 5.9 percent annual rate in the first three months of the year but cooled noticeably in the second quarter, has moderated enough to be consistent with continued low inflation. If it has not, then interest rates may have to go up, he warned.

"I have no doubt that the current stance of policy, characterized by a nominal federal funds rate around 5.5 percent, will need to be changed at some point to foster sustainable growth and low inflation," the Fed chairman said, referring to the interest rate banks charge each other on overnight loans. While financial markets often react sharply to such changes in the funds rate, he called them a "routine aspect of responsible policymaking."

Nevertheless, Greenspan seemed more willing than he has in the past to entertain the notion that something fundamental may have changed in the American economy to make it less inflation-prone and more productive.

Greenspan cited several factors that may have contributed to allowing the nation to have a low 5 percent jobless rate without triggering large enough wage gains to add to inflation. On his long list were technological improvements, deregulation of a number of industries, a surge in business investment that has boosted production capacity and productivity, a heightened sense of job insecurity among workers, a strong dollar that has lowered the cost of imported goods and services, changes that have reduced health care costs and "the reduced market power of labor unions."

"Many of the forces are limited or temporary, and their effects can be expected to diminish, at which time cost and price pressures would tend to reemerge," he warned. But some of the changes, particularly technological developments, may have a more permanent impact.

"We do not now know, nor do I suspect can anyone know, whether current developments are part of a once- or twice-in-a-century phenomenon that will carry productivity trends nationally and globally to a new higher track, or whether we are merely observing some unusual variations within the context of an otherwise generally conventional business cycle expansion," he said.

The true constraint on the economy, Greenspan told the committee, is that the nation does not have enough people who don't have jobs to allow employment to continue to rise as rapidly as it has since the end of the 1990-91 recession.

Some 13 million jobs have been added during this six-year period, he noted, and since early 1994 only about half the 2 million additional workers hired have come from the growing population of people aged 16 to 64. The other half have come from the ranks of the unemployed or from those who wanted a job but weren't actively seeking work and therefore were not counted as unemployed.

"The unemployment rate has a downside limit if for no other reason than unemployment, in part, reflects voluntary periods of job search and other frictional unemployment," he said.

Economists use "frictional unemployment" to refer to the joblessness that results when people either lose or voluntarily leave one job and may not be willing or able to move immediately into a new one.

Several subcommittee members, including Democratic Reps. Barney Frank and Joseph P. Kennedy of Massachusetts and Rep. Bernard Sanders, I-Vt., renewed their criticism of Greenspan for being too willing to raise interest rates to head off inflation.

Sanders accused Greenspan of being out of touch with working Americans and of favoring the wealthy by concentrating on keeping inflation under control.