NEW YORK (CNN/Money) -
Federal Reserve Chairman Alan Greenspan told a Senate panel Tuesday the economy is strong and that the risk of inflation appears to be in check, comments that reinforce the broad market belief the Fed will slowly raise interest rates in the year ahead.
In remarks to the Senate Banking Committee Tuesday, which was holding confirmation hearings on his renomination as the nation's top central banker, Greenspan warned that economic forecasts, even in the short-term, are never certain, and there is a always a risk of future terrorist attacks or other shocks to the economy.
But he said he believed the economic recovery has shown some "legs" that would allow further increases in employment and wages into next year. He said businesses have been relatively slow to tap corporate debt markets for expansion plans and other capital investments.
"There is yet another shoe to drop in the expansion, which is an increasing sense of confidence in the business community to move up capital investment," he said when asked about the economic outlook going into 2005. "That's why I think the recovery has some momentum."
While he did not give any specifics in his or the Fed's plans for interest rate increases to come, he repeated earlier statements that imply rates would be increasing, but at a fairly "measured" pace.
"Our best judgment is that the economy is growing in a solid fashion," he said in response to a question. "To be sure, underlying unit costs, after having gone down for some period, have started to turn up modestly. But inflationary pressures are not likely to be a serious concern in the period ahead."
But he did add the caveat that, "Clearly this is our general view of the outlook and forecasts are subject to error."
Later in his testimony he suggested that the Fed should be able to slowly raise rates and maintain economic growth without a spike in inflation, but he added, "We seem to be on track, but as a golfer would say, it's not a 'gimme' putt."
Investors have been watching comments by the Fed chairman, along with economic reports such as Tuesday's consumer price index, for signs that stronger-than-expected inflation would force the Fed to quickly raise rates to maintain price stability.
Greenspan's comments and the CPI report helped lift bond prices and lower the yields on 10-year bonds Tuesday, as fears that the Fed would move to hike rates as much as a half-percentage point at its June 30 meeting faded.
In his opening remarks, the Fed chairman said the economy has proven resistant to damage by terrorist attacks and other financial shocks, such as oil price spikes.
"Going forward, we must remain prepared to deal with a wide range of events. Particularly notable in this regard is the fortunately low, but still deeply disturbing, possibility of another significant terrorist attack in the United States," he said.
"Our economy was able to absorb the shock of the attacks of Sept. 11 and to recover, though remnants of the effects remain."
He also said he believes the economy is positioned to continue the strong employment gains seen over the last few months.
He said the slow recovery in employment since the last recession is due to unusually strong productivity gains by businesses. He said he would support a short-term extension of unemployment benefits for long-term unemployed whose benefits have expired.
He also said the benefits of the economic recovery should start being seen more by employees through improved wages and hiring levels, rather than going primarily into improved corporate profits.
"The sharp decline in share of national income going to employees appears to be reversing," he said. "It's not a long-term trend."
Greenspan, chairman of the Fed since 1987, was renominated last month for another four-year term by President Bush, although he will likely have to give up the job when his term as Fed governor expires in early 2006.
His confirmation is seen as virtually assured. Most senators began their remarks with praise of his tenure. Sen. John Sununu, a New Hampshire Republican, joked about asking him on which piece of currency Greenspan would like his image to appear.
But Sen. Jim Bunning, a Kentucky Republican who is a long-time Greenspan critic, said he was certain he would be the only member of the committee to vote against Greenspan.
Greenspan faced some tough questions from other senators.
Some Republicans are concerned about how fast the Fed will move to raise interest rates ahead of November's election. Bunning said he hoped that the Fed wouldn't move to raise rates too fast as it did the last time it increased rates in 2000.
"I would very much like to see you be the chairman you've been since January 2001, (when rate cutting started) not the chairman of 2000," he said.
Democrats pushed him to come out against making the Bush administration's tax cuts permanent without cuts in spending or increases in other taxes to keep the deficit in check.
Greenspan would not go on record opposing the permanent tax cuts, saying he generally favored no taxes on stock dividends and a drop in marginal tax rates. But he did say that restrictions on spending and the size of the deficit in place before 2002 should be restored, which would have the effect of limiting the ability of Congress to extend the tax cuts.