WASHINGTON, 12 February 2004 — US Federal Reserve Chairman Alan Greenspan said yesterday the odds are tipped in favor of a jobs-rich, sustained economic expansion in the United States but he raised alarm over the spiraling deficit. “Looking forward, the prospects are good for sustained expansion of the US economy,” Greenspan said as he submitted the brightest outlook in years to a House of Representatives financial panel.
Greenspan presented a twice-yearly report on monetary policy, which upgraded the economic growth outlook for 2004 to 4.5 to 5.0 percent in the last quarter, up from last year’s forecast of 3.75 to 4.75 percent growth. But the powerful central bank chief said the record budget deficit, potential dynamite in an election year, could be a menace even in the short term.
President George W. Bush has come under fierce attack for spending plans that foresee an unprecedented $521-billion deficit for fiscal 2004 ending Sept. 30, and a shortfall of $364 billion in 2005. Long-term the deficit risks creating serious difficulties paying for the baby-boom generation as it retires. “The longer we wait before addressing these imbalances, the more wrenching the fiscal adjustment ultimately will be,” Greenspan said. But the deficit also creates short-term risks, because long-term rates are swayed by financial market expectations, he said.
“As a consequence, should investors become significantly more doubtful that the Congress will take the necessary fiscal measures, an appreciable backup in long-term interest rates is possible as prospects for outsized federal demands on national saving become more apparent,” he warned.
“Such a development could constrain investment and other interest-sensitive spending and thus undermine the private capital formation that is a key element in our economy’s growth prospects.”
Hiring had lagged far behind the rest of the economy, Greenspan told the financial services committee.
Companies had managed to squeeze more production out of existing workforces. But “as managers become more confident in the durability of the expansion, firms will surely once again add to their payrolls.” “Looking forward, the odds of sustained robust growth are good, although, as always, risks remain,” Greenspan said.
