Greenspan: Interest Rates Must Rise

WASHINGTON -- Federal Reserve Chairman Alan Greenspan told Congress on Wednesday that America's economic recovery has good momentum and that low, short-term interest rates will have to rise at some point, though he did not say when.

"Looking forward, the prospects for sustaining solid economic growth in the period ahead are good," Greenspan said in prepared testimony to the Joint Economic Committee.

Greenspan, in striking an upbeat tone about the economy, noted a much-awaited improvement in the hiring climate after a long period in which an uneven economic recovery had failed to produce significant increases in the nation's payrolls.

But with the rebound in the economy, some companies are finding it easier to raise their prices, Greenspan said. He also noted that the fall in the value of the U.S. dollar and a strengthening global economy were adding to pricing pressures at home.

While stressing that inflation currently remains low, he said it was the job of the Federal Reserve to be stay on the alert for an unwelcome flare-up in inflation.

"As I have noted previously, the federal funds rate must rise at some point to prevent pressures on price inflation from eventually emerging," Greenspan said. "As yet, the protracted period of monetary accommodation has not fostered an environment in which broad based inflation pressures appear to be building."

Since last June, Greenspan and his colleagues have held the federal funds rate -- a key short-term interest rate -- at 1 percent, the lowest since 1958. Most economists believe the Fed will leave rates at that level at its next meeting on May 4.

Looking ahead, some economists predict the Fed will begin to push rates higher later this year. But others believe rates might stay where they are into 2005.

Greenspan's comments marked the second signal in two days that the Fed was beginning to edge closer to raising interest rates. Greenspan's remarks before the Senate Banking Committee on Tuesday sent stocks tumbling as Wall Street investors feared a rate increase would come sooner rather than later.

"The Federal Reserve recognizes that sustained prosperity requires the maintenance of price stability and will act, as necessary, to ensure that outcome," Greenspan said in his testimony Wednesday.

As he did on Tuesday, Greenspan noted that deflation -- a prolonged and widespread decline in prices -- was no longer a concern as it was this time last year.

But at the same time, inflation for the most part remained tame, especially in the all-important area of wages, Greenspan said. He attributed this in large part to the long period of weak job creation the economy has endured.