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Greenspan urges pre-emptive action
The Fed may soon raise short-term interest rates

WASHINGTON (AP) -- Federal Reserve Chairman Alan Greenspan told Congress Thursday that inflation remains in check for now, but the central bank should consider taking pre-emptive action to prevent any threat to continued economic growth.

By using the word "pre-empt," Greenspan was sending a signal that the Fed is prepared to act soon to raise short-term interest rates to slow the economy, before clear signs of inflation begin to show, some private economists said. It was the second such hint from Greenspan this week.In order to keep the economy growing, "it is useful to pre-empt forces of imbalance before they threaten economic stability," Greenspan said. Sometimes that is not possible because the future "can be too opaque to penetrate," the Fed chairman said.

"When we can be pre-emptive, we should be because modest pre-emptive actions can obviate the need of more drastic actions at a later date that could destabilize the economy," he said.

Greenspan's testimony before the Joint Economic Committee came just a day after the government reported that inflation remained tame during May.

Despite that report, many private economists expect Fed policymakers to raise short-term interest rates either at their next meeting on June 29-30 or sometime later this year.

"Because monetary policy operates with a significant lag, we have to make judgments, not only about the current degree of balance in the economy, but about how the economy is likely to fare a year or more in the future," Greenspan said.

Greenspan reiterated what he told Congress earlier this week, that increases in American workers' productivity linked to improvements in technology have so far kept inflation in check, a significant change over the way the economy operated in years past.

However, he said, "Despite its extraordinary acceleration, labor productivity has not grown fast enough to accommodate the increased demand for labor induced by the exceptional strength in demand for goods and services."

The economy is in the middle of an exceptional period of strong growth and continued low inflation, Greenspan said. "For the period immediately ahead, inflationary pressures still seem well-contained."

But he added: "There are developing imbalances that give us pause and raise the question: Do these imbalances place our economic expansion at risk?"

Economic growth overall has averaged 4 percent a year, he said. Of that, about 2 percentage points are attributable to the increased worker productivity and another 1 percentage point to the growth in the number of working-age Americans.

"The remainder was drawn from the ever-decreasing pool of available job seekers," Greenspan said. "That last development represents an unsustainable trend."

The Fed has not raised interest rates in more than four years. When interest rates go up, borrowing becomes more expensive, consumers and businesses tend to spend less and thus the economy eventually tends to slow.