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Greenspan: Still No Inflation Victory

A sliced apple made of cans is part of the 14th annual "Canstruction" design competition and food drive at the New York Design Center on Nov. 9, 2006. The exhibit, which features 41 objects built from cans, will be open to the public through Nov. 22. (Photo: AP Photo/Seth Wenig)
AP Photo/Seth Wenig
Federal Reserve Chairman Alan Greenspan said on Thursday it was too early to conclude the U.S. economy has slowed enough to ward off inflation risks, signaling he is not yet ready to declare victory after a year-long campaign of rising interest rates.

In his semiannual report to Congress on the state of the economy, the Federal Reserve chairman played it safe, giving strong arguments in support of his notion that a technology-led productivity revolution has permanently altered the speed limit of the economy while reminding us that the laws of supply and demand haven't been repealed. Read his testimony or the full report.

But he also warned that tight labor markets and rising energy prices still might stoke inflation.

"It is much too soon to conclude that these concerns are behind us," Greenspan said in his prepared remarks to the Senate Banking Committee. "We cannot yet be sure that the slower expansion of domestic final demand, at a pace more in line with potential supply, will persist."

The powerful Fed chairman cautioned that even if the U.S. economy had slowed to a more sustainable rate of growth, the nation's job market may be so tight that it could still fire up wage and price pressures. But he also noted that there was no sign of a slowdown in productivity growth, which had helped to keep costs in check.

The Fed has raised short-term rates six times over the past year to quell inflation pressures in the world's top economy. Greenspan, speaking a month ahead of the Fed's next rate meeting, underlined that the central bank still views inflation as the main threat to the nearly decade-long U.S. expansion.

Wall Street apparently was not spooked by Greenspan's worries about inflation. Stock indexes reversed Wednesday's losses with early gains and remained steady through early afternoon trading, buoyed by solid earnings reports from high-tech heavy-hitters.

According to CBS Marketwatch numbers, the Dow Jones industrial average climbed 147.79 points to 10,843.87, while the Nasdaq ended the day at 4,184.56, up 128.93. The Standard & Poor's 500 index nudged up 13.51 to close at 1,495.47.

Bond prices, which move in the opposite direction of yields, rose: The yield on the Treasury Department's 30-year bond dipped 0.99 to 5.81 percent. Bond markets are sensitive to inflation because it discounts the value of a bond when it is cashed in.

Stock market volatility, rising interest rates and surging oil prices, which can reduce the amount of money people have to spend on other things, all have been factors in slowing growth, Greenspan said.

Analysts were divided over whether the fed will hike rates aits Aug. 22 meeting. Some economic figures support the case for another rate hike. Consumers are spending more freely than expected and the labor market remains tight.

"He'll do what the Fed chairman is supposed to do: Keep the market guessing," FleetBoston Financial chief economist Wayne Ayers said of the Fed chief's expected testimony.

CBS Early Show financial consultant Brian Finnerty said investors would "like to hear that the economy is rolling along without any inflation, which, in fact, it is."

The Fed has raised short-term interest rates six times in the last 13 months in a bid to slow the U.S. economy and ward off inflation. Policymakers have been eager for signs that this tightening campaign is finally showing results.

Greenspan and his colleagues have long worried that persistently tight labor markets may lead workers to demand higher wages and benefits. The U.S. unemployment rate fell last month to 4 percent, down from 4.1 percent in May but up from the 30-year-low of 3.9 percent recorded in April.

With more money in their pockets, consumers are likely to keep on spending freely, exacerbating the Fed's concern about demand outstripping supply and thus causing higher inflation.

Greenspan and other Fed officials have expressed concern that sharp gains in stock prices could boost consumer spending to levels where supply could not keep pace anymore, threatening to push up prices and wages.

Greenspan's appearance Thursday was part of the Fed's long-standing tradition of providing twice-yearly monetary policy reports to lawmakers, dating back to the 1978 Humphrey-Hawkins Act that made it accountable to Congress.

The legal requirement for a semi-annual monetary report contained in that act expired earlier this year but lawmakers are trying to renew it. While that bill is pending, lawmakers and the Fed agreed to carry on the tradition this month.

Greenspan is scheduled to repeat his report to the House Banking Committee on July 25.

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