U.S. Federal Reserve Board Chairman Alan Greenspan Wednesday gave a generally upbeat economic assessment to a congressional committee, saying the U.S. economy seems over the last two months to have withstood the trauma of sharply rising energy prices.
Two months ago Mr. Greenspan said the economy had hit a soft-patch, slowed down because of higher oil and gasoline prices. The slow down was reflected in lower employment gains and slower gains in retail sales. But the central bank chief says more recent data reveals an economic pickup in August, even though energy prices remain high.
"Despite that fact, the underlying structure of the recovery is still there and in my judgment, were it not for the very sharp rise in oil prices, we would still be seeing some fairly strong growth," said Mr. Greenspan.
Financial markets interpreted Mr. Greenspan's remarks as evidence that the central bank is likely to again raise short-term interest rates when it holds a policy-making meeting September 21.
Mr. Greenspan appealed to lawmakers to hold down the predicted explosive growth in the budget deficit once the post-World War II baby boom generation begins to draw government health and retirement benefits later this decade. The 78-year-old central banker said Congress must avoid promising financial benefits it may not be able to deliver. Unless the deficit is narrowed, said Mr. Greenspan, there is a danger of stagflation, a combination of high interest rates and high inflation.
"The issue that in a practical sense is something we need to avoid is not an unstable break down of the system but significantly higher rates of inflation, inflation premiums embodied in long-term interest rates, and what we used to call, I guess we still would, stagflation," he said.
The U.S. economy last experienced stagflation in the 1970s as a consequence of the two unexpected sharp increases in energy prices.