Budget Deficits a Risk to Low Interest Rates, Greenspan Says ; in His Economic Report to Congress, His Words on Red Ink Are More Negative Than the White House View

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Federal Reserve chairman Alan Greenspan took issue with the White House view that rising budget deficits pose little near-term threat to the climate of low interest rates that the US economy enjoys.

Rising red ink, he said, could potentially push up long-term interest rates in the near term, potentially slowing an economy now struggling to create jobs.

The comments on the budget deficit came as Mr. Greenspan gave a generally upbeat assessment of a recovering economy Wednesday to Congress.

But he worried more than anticipated about the recent surge in the forecast for federal budget deficits in years ahead. The deficit could, he said, "put substantial pressure" on the nation's ability in coming years to provide "even minimal government services" while maintaining such programs as Social Security and Medicare "without debilitating increases" in taxes.

He also had a stark warning about potential near-term impacts of a federal deficit projected at $521 billion this year: If investors doubt Congress's ability to tame expenditures, "an appreciable backup in long-term interest rates is possible." The Bush administration, by contrast, has downplayed such near-term risks, while pledging to cut the projected deficit in half by 2009.

Still, the Fed chairman's semiannual report on monetary policy to the House was mostly reassuring.

"The picture has brightened," he said. The recovery is solid. "In all likelihood, employment will begin to grow more quickly before long. …