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US Economy Good But Serious Risks Ahead, says Central Bank Chief - 2004-02-11

The head of the U.S. central bank, Alan Greenspan, Wednesday told a congressional committee that the prospects of the U.S. economy are good, but that there are serious risks ahead.

Mr. Greenspan said 2003 appears to have been a transition year for the U.S. economy, going from sub-par performance to more vigorous growth. The 77-year-old central bank chief said as the expansion gathers pace so too will the pace of employment growth, which he said has been held back by productivity gains and a business drive to increase efficiency.

Mr. Greenspan identified higher oil prices, a declining dollar, and lack of action to bring down the growing budget deficit as risks facing the economy. On the deficit, the Federal Reserve Board chairman deplored what he sees as the absence of a credible plan to bring down the record high fiscal deficit that has reached over $500 billion and shows no sign of declining. He also voiced a clear preference for spending reductions over tax increases as a means of narrowing the deficit.

"We ought to be looking at getting as much as we can in the longer run from spending restraint before we look at filling the gap on the tax side in order to get a viable fiscal policy." he said.

Mr. Greenspan suggested that short-term interest rates can remain at their current very low levels for a bit longer. But eventually, he said, rates must rise.

"The real federal funds rate will eventually need to rise to a more neutral level," he said, referring to the overnight interest rates charged by banks. "However, with inflation very low, the Federal Reserve can afford to be patient in removing its current policy accommodation."

Mr. Greenspan said the dollar had undergone a very substantial decline on currency exchange markets during the course of 2003. But he said the inflationary impact of such a decline had been muted by competitive pressures that kept businesses from increasing prices.

Mr. Greenspan's overall message is that the U.S. economic outlook has improved significantly in the past eight months. But he is clearly worried by the growing budget deficit and he also voiced concern that at some point foreigners may no longer be willing to finance the still very large U.S. trade deficit.