WASHINGTON -- The U.S. economy remains strong with few signs of immediate inflationary pressures even as an era of low wage gains may be ending, Federal Reserve Chairman Alan Greenspan said yesterday.
"The economy has retained considerable vigor, with few signs of the imbalances and inflationary tensions that have disrupted past expansions," Greenspan said. "By some important measures of price trends, inflation actually slowed a bit in 1996."
Analysts interpreted Greenspan's comments to the Senate Budget Committee as suggesting the Fed's policy-making Open Market Committee will not raise interest rates when it meets Feb. 4-5.
Still, the Fed chairman left the door open for action later if inflation accelerates because of rising wage levels. Although it has taken awhile, tight labor markets are beginning to put upward pressure on wages, he said.
"The relatively modest wage gains we've seen are a transitional rather than a lasting phenomenon," Greenspan said. "Indeed, the recent pickup in some measures of wages suggests that the transition may already be running its course."
If that is the case, the Fed chairman suggested, the central bank will have to consider raising the federal funds rate on banks' overnight loans to each other.
"The important question from a monetary policy point of view is whether prospective labor market conditions will be consistent with the maintenance of satisfactory price performance," Greenspan testified.
So far, wages have increased at a modest pace and that has kept prices in check, said Sung Won Sohn, chief economist at Norwest Corp. in Minneapolis.
Greenspan "made it clear that we are probably at the end of that good luck period," Sohn added. "From here on, we should expect a somewhat higher rate of wage gains and therefore inflation."
Sohn also said Greenspan's comments -- as well as the overall economic outlook -- suggest the Fed will raise the rate on overnight bank loans about a quarter-point this spring. That's "likely to be followed by another couple of tightenings later this year," Sohn said.
The Fed will get an important clue on wage trends Tuesday when the Labor Department releases its employment cost index for the fourth quarter of 1996.
Bonds surged in the wake of Greenspan's comments. The benchmark 30-year Treasury bond rose 1/2 , pushing down its yield more than 4 basis points to 6.78 percent. Stocks, meanwhile, continued to march higher. The Dow Jones industrial average closed up 40.03 points at 6,883.9, another record.
Greenspan also told the Budget Committee that researchers at the Federal Reserve had determined "the inflation rate is overstated" by about 1.0 percentage point a year. That is close to the conclusion of a congressionally appointed commission headed by Stanford economist Michael Boskin, which placed the overstatement at 1.1 percentage points a year.
"The CPI overstates inflation because of the slow introduction of new products and inadequate adjustment for quality improvements" in the price survey, Greenspan said.
That suggests the nation's current level of economic well-being "is higher than we had thought," he said.
Pub Date: 1/22/97