Federal Reserve Chairman Alan Greenspan, warning that the current economic good times could be cut short if inflationary pressures emerge, urged Congress Wednesday to aim for budget surpluses to help cushion the impact of a slowdown.
Greenspan told the House Budget Committee that declining deficits in recent years were due largely to an economy that has exceeded expectations, but he said it could sour.He said inflation remained the greatest threat to the current expansion, now in its seventh year and the third longest on record.
Greenspan said that the strong increases in employment, which have pushed the jobless rate down to the lowest levels in nearly a quarter of a century, may not last. It may be only a matter of time until tight labor markets trigger inflation, he said.
"To believe . . . that wage pressures will not intensify as the group of people who are not working, but who would like to, rapidly diminishes, strains credibility," he said in his prepared remarks. "The law of supply and demand has not been repealed. If labor demand continues to outpace sustainable increases in supply, the question is surely when, not whether, labor costs will escalate more rapidly."
Federal Reserve policy-makers passed up the chance to raise interest rates last week, preferring to continue watching for signs that the best performance on inflation in three decades was starting to erode.
However, many economists believe the central bank will be forced to boost rates to slow economic growth before the year is out.