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Greenspan reiterates view
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July 28, 1999: 1:33 p.m. ET
Fed chairman repeats earlier warning he is watching for signs of inflation
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NEW YORK (CNNfn) - Federal Reserve policy-makers may raise interest rates again to prevent inflation from flaring up in the near-future, Federal Reserve Chairman Alan Greenspan told the Senate Banking Committee Wednesday.
His remarks mirrored testimony given to the House Banking Committee last week, when he spooked financial markets with the warning that the central bank will act "promptly and forcefully" on interest rates if it senses any signs of rising inflation.
While Greenspan avoided a specific signal that the Fed's policy-setting Open Market Committee would raise the overnight bank loan rate again at its next meeting on Aug. 24, he did speak of another "pre-emptive" strike against inflation -- one that would keep the U.S. economic expansion on track. The FOMC raised the so-called fed funds rate by a quarter point at the conclusion of its June 29-30 meeting.
"If new data suggest it is likely that the pace of cost and price increases will be picking up, the Federal Reserve will have to act promptly and forcefully so as to preclude imbalances from arising that would only require a more disruptive adjustment later,'' the Fed chairman repeated.
Verbatim
Greenspan's remarks were the second leg of the Fed's twice-yearly outlook required by the Humphrey-Hawkins Full Employment and Balanced Growth Act of 1978. And, as is customary, Greenspan re-read verbatim the testimony he gave the House Banking Committee a week ago before fielding questions from senators.
Both stocks and bonds registered little reaction to Greenspan's comments. At midday, the Dow Jones industrial average was up just over 10 points while the benchmark 30-year Treasury bond was little changed with a yield of 6.02 percent.
In the more-anticipated Q&A session, Greenspan avoided giving any signal to senators or to financial markets of what the Fed's next move on interest rates might be.
Rather, the Fed chief addressed one of his more favorable themes - productivity and the boost that it has received from advances in technology.
Greenspan said there's no question that the economy has endured a major technological shift, with no sign that productivity gains resulting from advances in technology are slowing. But, he said, if the rate of growth of those gains begins to flatten it could result in inflationary pressures in the economy -- something the Fed is determined not to let happen.
So far, "increasingly evident" increases in productivity growth are holding down inflationary pressures, Greenspan said. After holding at about the 1-percent mark through the 1970s and 1980s,
productivity growth has been above 2 percent the past three years, he pointed out.
To cut or not to cut
At issue on Capitol Hill lately has been what to do with the $99 billion budget surplus expected for fiscal 1999 - whether to reduce taxes, boost social spending or pay down the country's debt.
Greenspan provided a perspective on what Congress should do about that -- reduce the debt and offer moderate tax cuts, particularly a reduction in capital gains and sales taxes.
"The longer we can allow them to run down the debt outstanding, the better off we'll be," Greenspan said. "The more appropriate posture is to be cautious and recognize that history says when you've been expanding for nine years that somewhere out there is a slowdown and an adjustment. At that point to have the capability to cut taxes would be very good," he said.
When asked for his opinion about the plans of the New York Stock Exchange and the Nasdaq stock market run by the National Association of Securities Dealers to become publicly traded entities, the Fed chairman said: "I'm not overly concerned because one of the things about markets is that they converge towards natural monopolies in the sense that it is very difficult to have fragmented markets operating efficiently."
Until this year, the Fed chairman has been required by law to report on the central bank's view of the economy and monetary policy twice a year to committees in both houses of Congress. The provision of that law expires this year, leading to some speculation that the bi-annual testimony may be dropped from the schedule. 
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