Gradual Fed Rate Hikes Expected

Federal Reserve Chairman Alan Greenspan said Tuesday that he didn’t expect inflation to pose a serious threat to the economy anytime soon, easing concerns that a big increase in consumer prices last month might prompt the Fed to speed up its timetable for raising interest rates.

Greenspan appeared to take in stride a Labor Department report, issued before he made his comments, that the consumer price index had surged 0.6% in May. It was the biggest monthly increase in three years and added to evidence that inflation pressures have been building as the economy has accelerated.

But so-called core inflation -- which excludes volatile energy and food prices -- increased only 0.2%, a modest rise that cheered stock and bond investors.

Greenspan said Fed officials still believed they could begin boosting short-term interest rates at a “measured” pace. The first increase is widely expected when the Fed’s policymaking Open Market Committee meets June 29 and 30.

Wading into a debate fraught with election-year politics, Greenspan also said he was disturbed by the federal government’s ballooning budget deficit. He urged Congress to adopt budget rules that would make it difficult to extend President Bush’s tax cuts unless lawmakers found a way to offset the revenue loss.

“There is no way to look at the longer-term trends of our fiscal system without concluding that we will run into fairly serious difficulties in the next decade ... as the very large increase in baby boomer retirees leaves the labor force,” he said. “I’m fearful

Greenspan said he was less concerned about the prospects for the economy over the next year or so. The recovery “seems to have legs,” job creation is picking up, and price increases remain modest so far, he said.

“Our general view is that inflationary pressures are not likely to be a serious concern in the period ahead,” Greenspan told members of the Senate Banking Committee, which is considering his nomination for an unprecedented fifth term as central bank chairman.

The 0.6% increase in the overall consumer price index in May was the largest since January 2001.

Energy prices jumped 4.6%. Gasoline prices reached record levels in May in response to rising crude oil prices, shortages of refining capacity and regional fuel blend restrictions that make it difficult to move gasoline from one market to another.

For the 12 months ended in May, the overall CPI was up 3.1%, the Labor Department said. Core inflation was 1.7% for the 12-month period. Both measures have been rising as the recovery has picked up speed.

Still, last month’s increase in core inflation was in line with economists’ expectations and believed to be within a comfort zone that wouldn’t spur the Fed to increase rates more aggressively than previously expected.

Many analysts believe that the central bank will approve several rate hikes this year, probably in increments of 0.25 percentage point. The increases would boost the benchmark federal funds rate charged by banks for overnight loans from its 46-year low of 1%.

“Greenspan seems pretty comfortable,” said Goldman Sachs economist Jan Hatzius. “He’s pretty upbeat about the growth outlook. He doesn’t seem very nervous about the inflation outlook. This is somebody who thinks it makes sense to move away from the 1% funds rate, but at a pretty slow pace.”

Greenspan was pressed by Banking Committee members to discuss the president’s latest tax-cut plan, which would extend tax reductions that are scheduled to expire between now and 2010 at an estimated cost of $1.2 trillion over 10 years.

He said he remained “very strongly supportive” of the tax cuts already on the books and would favor extending them. But he said they should be subject to pay-as-you-go budget rules that discourage enactment of new tax cuts or spending increases unless lawmakers take steps to offset the revenue loss they would cause. Congress previously operated under such rules, but they expired in 2002.

“I would hope that the Congress will put them back in place,” Greenspan said. “Because the individual tax cuts which I find very important would lapse, they would ... be required to go through a pay-go evaluation in order to be passed.”

Members are currently considering a proposal to require that 60 of the 100 senators vote for tax cuts or spending increases that are not offset by deficit reductions elsewhere. Some Republicans want this pay-as-you-go provision to apply only to spending increases and not to the president’s tax cuts.

Greenspan said the U.S. economy was “growing in a solid fashion.”

The Fed chairman was asked by Sen. Jim Bunning (R-Ky.) whether he thought it was correct to describe current conditions as “the worst economy since the Great Depression,” a characterization used recently by Bush’s leading Democratic challenger, Sen. John F. Kerry.

“I would strongly disagree with that statement,” Greenspan said.

Greenspan, 78, was recently nominated by Bush to serve a fifth four-year term as Fed chairman, a post he has held since 1987. He is expected to win Senate approval with little opposition.