NEW YORK (CNN/Money) - Federal Reserve Chairman Alan Greenspan expressed optimism Wednesday about the prospects for the U.S. economy and job growth, but said the central bank could be "patient" about raising interest rates and warned against rising federal budget deficits.

In his semi-annual testimony before the House Financial Services Committee, the Fed chairman said the central bank expects strong economic growth, eventually leading to more jobs, in 2004.

Greenspan said the Fed expects gross domestic product (GDP) growth in 2004, adjusted for inflation, of between 4.5 percent and 5 percent, slightly more optimistic than the Blue Chip survey's latest consensus forecast of 4.6 percent.

Sustained economic growth at that level -- driven by low interest rates, higher corporate profits, improving household balance sheets and stimulative fiscal policy, among other things -- should help jobs grow faster than they did last year, he said.

"In all likelihood, employment will begin to grow more quickly before long as output continues to expand," he said in prepared remarks.

Federal Reserve Chairman Alan Greenspan expressed optimism about the prospects for the U.S. economy. CNNfn's Kathleen Hays reports. Play video (Real or Windows Media)

Fed policy makers, on average, expect the unemployment rate to average between 5.25 and 5.5 percent in the fourth quarter of 2004, Greenspan said, compared with the January 2004 level of 5.6 percent.

In response to a lawmaker's question, Greenspan addressed the Bush administration's recent forecast of an average level of payroll employment in 2004 about 2.6 million jobs higher than in 2003 -- a forecast that would require gains of about 320,000 new jobs per month, or 3.8 million new jobs per year, to come true.

Greenspan suggested that, if productivity -- the amount of work businesses get out of their employees -- were to fall significantly to "more historic levels," the White House forecast is "feasible."

"But we have not yet seen any evidence that is indeed the case," he said, though he later added that he did expect some slowdown in productivity growth from last year's extremely high levels. "I just find it highly difficult to imagine that we can continue to advance efficiencies as quickly as we've been doing."

The Fed's monetary policy report expressed more certainty than Greenspan that productivity growth -- which averaged 4.9 percent and 4.2 percent in the past two years, the first two-year stretch above 4 percent since World War II -- would stay at fairly high levels.

"Prospects for sustained high rates of increase in productivity are quite favorable," the report said. "Businesses are likely to retain their focus on controlling costs and boosting efficiency by making organizational improvements and exploiting investments in new equipment."

That should temper any boom in hiring, keeping wage and salary growth low, in turn keeping inflation growth low. The Fed expects the Commerce Department's price index for personal consumption expenditures -- the Fed's favorite consumer inflation measure -- should slow to an average level of between 1 percent and 1.25 percent in the fourth quarter, compared with 1.4 percent in the fourth quarter of 2003.

With that in mind, Greenspan said, the Fed can be "patient" in moving its target for a key overnight lending rate up from its current level, the lowest in more than 40 years.

His statement seemed to convince U.S. financial markets that an interest rate hike would come later rather than sooner. Stock and bond prices rose, pushing interest rates lower. The value of the U.S. dollar fell against the Japanese yen and other currencies.

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Greenspan added, however, that the Fed couldn't keep its current policy in place forever and said it was aware of the risk it could end up being out of sync -- "improperly calibrated," in his words -- with economic developments.

"The evidence indicates clearly that such a policy stance will not be compatible indefinitely with price stability and sustainable growth; the real federal funds rate will eventually need to rise toward a more neutral level," he said.

Though Greenspan said employment was not the only factor driving the Fed's policy decisions, many economists doubt the Fed will start raising rates until it sees significant job growth.

"Once we get a few strong payroll gains, the tightening cycle will commence," said Steve Stanley, an economist with RBS Greenwich Capital Markets. "That could be three months away or another year away. No one, including Greenspan, knows the timeframe; but make no mistake, tightening is coming sooner or later."

Greenspan also warned lawmakers that they needed to act to rein in bulging federal budget deficits or risk pushing long-term interest rates higher "in the relatively near term," as well as more serious repercussions in later years, when Baby Boomers begin to retire and draw down Social Security and Medicare benefits.

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"The imbalance in the federal budgetary situation, unless addressed soon, will pose serious longer-term fiscal difficulties," Greenspan said.

In response to a lawmaker's question, Greenspan suggested -- as he often has -- that the problem would better be solved by spending restraint, rather than by reversing recent tax cuts.

Greenspan said the economy's large current account deficit, the broadest measure of the trade gap, makes the budget deficit even more worrisome, since it shows the United States is greatly indebted to the rest of the world.

"Foreign investors, both private and official, may become less willing to absorb ever-growing claims on U.S. residents," Greenspan warned.

He also stressed several times that the U.S. work force needed to be better educated, in order to find new jobs when old jobs were shipped overseas or replaced by technology, and to reduce a growing inequality between low-income and high-income Americans.