- The Washington Times - Friday, February 18, 2000

Federal Reserve Chairman Alan Greenspan called the economy's record-breaking performance the best in a half century, but warned Thursday that inflation remains a threat to America's economic good times.
Wall Street viewed Mr. Greenspan's remarks to the House Banking and Financial Services Committee as confirmation that the Fed will continue to ratchet up interest rates this year until the economy slows to a more sustainable pace.
In presenting the central bank's twice-a-year report on the economy to Congress, Mr. Greenspan reiterated his concern that employers seeking scarce workers in the current "tight" labor market may offer higher wages and benefits, increased costs that could lead to a sharp rise in product prices.
"At some point in the continuous reduction in the number of available workers willing to take jobs … wage increases must rise above even impressive gains in productivity" that have helped to keep inflation low, Mr. Greenspan said.
"This would intensify inflationary pressures or squeeze profit margins, with either outcome capable of bringing our growing prosperity to an end," he said.
In efforts to slow the barreling economy and keep inflation at bay, the Fed has bumped up interest rates four times since June, overall pushing up by a full percentage point key interest rates that the Fed controls.
But Mr. Greenspan said those increases have had little impact.
"There is little evidence that the American economy … is slowing appreciably," he said.
Fed policy-makers "will have to stay alert for signs that real interest rates have not yet risen enough to bring the growth of demand into line with that of potential supply," Mr. Greenspan said. "Achieving that alignment seems more pressing today than it did earlier."
Most analysts widely expect that Fed policy-makers will boost interest rates again at their next meeting March 21, and many also anticipate another rate increase in May.
Economists said Mr. Greenspan's comments appear to support their predictions of a series of rate increases this year.
Sung Won Sohn, economist for Wells Fargo, viewed Mr. Greenspan's remarks as saying, "The prescription that we need is high interest rates. I think Chairman Greenspan is probably getting the message that so far this slow-motion monetary policy has done nothing to dampen the enthusiasm in the economy and especially the stock market."
"He talked tougher than some had expected," said David Jones, chief economist at Aubrey G. Lanston & Co.
Even though inflation has remained low outside of an energy-price surge, Mr. Greenspan said this favorable condition cannot last unless the economy's growth rate slows to less than the 4 percent-plus gains of the past three years.
Still, Mr. Greenspan marveled at the economy's performance: its record 9-year expansion; unemployment at a 30-year low of 4 percent; and strong gains in worker productivity output per hour of work.
But even if the productivity gains continue, they could have a downside for the economy by pushing soaring stock prices even higher, Mr. Greenspan said. The Wall Street boom has contributed to the growth in consumer demand as investors have spent their stock gains with abandon.
Responding to a question, Mr. Greenspan expressed some short-term worries about the leap in oil prices, which on Monday pushed the per-barrel price above $30 to the highest levels since the Persian Gulf war in 1991.
Oil inventories have fallen to exceptionally low levels, he said, leaving the country vulnerable to a big price spike if supplies suddenly drop further.
"Some are joking that we need to measure the fumes to get any measurable inventory at all these days," he said.
But the Fed chairman also said conservation moves by businesses in recent years significantly have reduced manufacturers' energy needs.
The Labor Department reported Thursday that the better-than-expected January performance in its Producer Price Index, which measures inflation pressures before they reach the consumer, followed a tiny 0.1 percent advance in December.
For all of 1999, wholesale prices had risen by 3 percent, the worst showing in nine years, but all of the pressure came from a surge in energy prices. Outside of food and energy, wholesale prices rose a much more subdued 0.9 percent last year, far better than the 2.5 percent increase in 1998.
In a second economic report Thursday, the Labor Department said that the number of Americans filing new claims for unemployment benefits fell by 20,000 to 283,000 last week. The four-week moving average for claims, at 282,000 last week, has been below the 300,000-level for more than six straight months, underscoring that labor markets are currently tight.
In its outlook for economic growth, the Federal Reserve was more optimistic than the administration or the Congressional Budget Office, predicting the gross domestic product will expand by 3.5 percent this year. President Clinton based his current budget on a slower 2.9 percent prediction.
The Fed also was more optimistic that inflation will slow this year, predicting that an inflation gauge tied to the GDP will rise by 1.75 percent to 2 percent, compared with an increase of 2 percent last year.
As he has before, Mr. Greenspan urged Congress to devote the huge federal budget surpluses being generated by the economic boom to paying down the national debt rather than for increased federal spending or cutting taxes.

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