WASHINGTON (AP) -- Federal Reserve Chairman Alan Greenspan said Monday that recent increases in productivity have been a principal factor holding down inflation. But he cautioned that those increases cannot continue forever.
Private economists viewed Greenspan's remarks as hinting at future Fed interest rate increases to slow an economy that is threatening to overheat. They said Greenspan was likely to make that warning more explicitly when he appears before Congress again on Thursday."The Fed chairman is telling us today that ... even with great productivity growth, if demand gets out of control, particularly with the world on the rebound, then inflation can get out of hand," said David Jones, chief economist at Aubrey G. Lanston & Co. in New York.
Jones and other economists said with growing signs of rebound in Japan and other countries overseas that have been in steep recessions, Greenspan is likely to signal that U.S. interest rates will need to be increased to slow the U.S. economy and keep inflation under control.
Speaking at the opening of a three-day congressional summit on high technology, Greenspan called the performance of the U.S. economy outstanding. He credited American investment in productivity-enhancing equipment such as computers for the good combination of strong economic growth and low inflation.
"An economy that 20 years ago seemed to have seen its better days is displaying a remarkable run of economic growth that appears to have its roots in ongoing advances in technology," Greenspan said in testimony to the congressional Joint Economic Committee.
Greenspan noted that productivity, the amount of output per hour of work, has been growing at an annual rate of around 2 percent since 1995, double the annual gains of the previous two decades.
He credited these gains in part to a surge in business investment in a variety of high-tech products from computers to fiber-optic cable.
Productivity is considered the crucial element in raising living standards because it allows employers to pay their workers more without triggering inflationary pressures by having to raise the cost of products.
But Greenspan cautioned that these productivity gains cannot go on forever.
"The growth of productivity cannot increase indefinitely," he said. "While there appears to be considerable expectation in the business community, and possibly Wall Street, that the productivity acceleration has not yet peaked, experience advises caution."
Greenspan, who in 1996 worried that investors' "irrational exuberance" may have pushed stock prices too high, reminded the committee that he has cautioned a number of times about the dangers in believing that the world has entered some new economic era because of breakthroughs in technology.
"History is strewn with projections of technology that have fallen wide of the mark," Greenspan said. "Despite the remarkable progress to date, we have to be quite modest about our ability to project the future of technology and its implications for productivity growth and for the broader economy."
Greenspan will testify Thursday on monetary policy.
The Fed last month changed its policy bias to lean in favor of raising interest rates and financial markets have grown increasingly worried that Greenspan will announce on Thursday that the Fed will soon start raising interest rates.
The Fed has not raised U.S. interest rates in more than four years. It last changed rates last fall, when it engineered three rate reductions in a successful effort to keep global economic turmoil from disrupting the U.S. economy.