Fed Chief Not Worried About Inflation

A week before the Federal Reserve will consider whether to cut interest rates for the sixth time this year, Chairman Alan Greenspan met with senators Wednesday and repeated his view that inflation remains tame because higher labor and energy costs aren’t feeding through into the broader economy.

“It’s very difficult to see” any short-term inflation problem, even though as U.S. growth has slowed down, unit labor costs have gone up, Greenspan said. “We’ve seen no evidence that those costs are being passed through into final prices in any material way.”

The same is true of the “fairly extraordinary increase” in energy costs over the last year, he said. “We’ve tried to trace the movement of energy costs into prices, and we’ve found that almost all does not go into final goods prices, but is squeezing profit margins,” Greenspan said.

The Fed chief, testifying before the Senate Banking Committee, did not directly discuss the future course of interest-rate policy. To ward off recession the Fed has slashed interest rates five times this year. Many analysts predict policymakers will make a sixth cut of either a quarter point or a half point at the end of their two-day meeting June 27.

By indicating that he believes inflation is under control, Greenspan appeared to leave the door open for another rate cut.

In his testimony, Greenspan reiterated that the weakened economy has caused an increase in bad loans at banks, which in turn has made bankers more cautious about lending. He also noted weakness in several industries: health care, telecommunications, retailing, manufacturing and California utilities.

He again said he’s not worried that the new $1.35-trillion tax cut might plunge the federal budget into deficit.

“I’m not, Senator,” Greenspan replied when asked by Sen. Charles E. Schumer (D-N.Y.) whether he was concerned about a potential slide back into deficit spending.

On another economic issue, Greenspan said that a recent increase in layoffs--new claims for state unemployment insurance have risen to more than 400,000 a week--will affect consumers’ confidence and willingness to keep buying.

However, he added, there hasn’t been “any real serious deterioration” in consumer spending.

During questioning, Schumer and several other Democratic senators prodded Greenspan to express concern about the 10-year tax cut. The cut is the centerpiece of Bush’s economic program.

Greenspan lent crucial support to Bush’s tax-cut proposal in January, and has subsequently stated his belief that reducing taxes is a preferred use for ballooning budget surpluses.

Associated Press and Bloomberg News contributed to this report.