WASHINGTON - Federal Reserve Chairman Alan Greenspan warned yesterday that mushrooming federal budget deficits eventually could threaten the national economy, which he said had shown impressive gains.
Greenspan, delivering the central bank's twice-a-year economic report card to Congress, offered a fairly upbeat assessment and expressed hope companies would step up hiring. Hiring has been painfully slow and become a political sore spot for President Bush.
Against that backdrop, Greenspan reaffirmed the Fed's stance that it would be patient in considering possible increases in short-term interest rates, which now are at a 45-year low of 1 percent. The comment pleased Wall Street. The Dow Jones industrials jumped 123.85 points to close at 10,737.70 - the highest level in more than 2.5 years.
Still, he said low interest rates will not be compatible indefinitely with the Fed's primary job of fighting inflation. Some private economists believe the Fed could start nudging up rates this year. Others predict rates will not change until 2005.
Greenspan tempered his optimism with a dose of caution about the dangers of budget deficits.
Last week, the Bush administration projected that this year's deficit will reach a record $521 billion.
Federal budget deficits could cause difficulties even in the relatively near term
Greenspan told the House Financial Services Committee.
Should investors become significantly more doubtful that the Congress will take the necessary fiscal measures an appreciable backup in long-term interest rates is possible Greenspan said.
That view is at odds with the administration, which has argued that the deficits pose no immediate threat of pushing interest rates higher.
The administration has pledged to cut the deficit in half over the next five years. Rep. Jay Inslee, D-Wash., said that pledge was a fantasy.
The committee chairman, Rep. Michael Oxley, R-Ohio, said the deficits are unavoidable given the challenges the country is facing.
The alternative would be to stop investing in economic stimulus or to fight against terror on the cheap
and I don't think the American people would want either of those options
Oxley said.
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