Statement by Alan Greenspan, Chairman, Board of Governors of the Federal Reserve System, before the Committee on the Budget, U.S. Senate, January 29, 1998
Greenspan, Alan, Federal Reserve Bulletin
Statement by Alan Greenspan, Chairman, Board of Governors of the Federal Reserve System, before the Committee on the Budget, US. Senate, January 29, 1998
In just a few weeks, the Federal Reserve Board will submit its semiannual report on monetary policy to the Congress. That report, and my accompanying testimony, will give a detailed assessment of the outlook for the U.S. economy and the implications for monetary policy. This morning, I would like to direct most of my comments to the fiscal situation. But let me begin by offering a few observations about the current direction of the economy.
First, it is clear that the U.S. economy has been exceptionally healthy, with robust gains in output, employment, and income. At the same time, inflation has remained low--indeed, declining by most measures--over the past year.
Second, to date, we have as yet experienced only the peripheral winds of the Asian crisis. But before spring is over, the abrupt current account adjustments that financial difficulties are forcing upon several of our Asian trading partners will be showing through here in reductions in demand for our exports and intensified competition from imports. All of this suggests that the growth of economic activity in this country will moderate from the recent brisk pace.
Third, as I have noted previously, such a moderation would appear helpful at this juncture. The growth of output has caused employment to rise much faster than the working-age population and there are limits to how far this can go. Pressures in the labor market likely contributed to the acceleration of wages in recent months. Since price inflation has been minimal and domestic profit margins firm, productivity appears to have accelerated sufficiently last year to damp increases in unit labor costs. How long that pattern can continue is still an unresolved issue. The likelihood that we shall be seeing some lower prices on imported goods as a result of the difficulties in Asia may afford some breathing room from inflation pressures. But they will not permanently suppress the risks inherent in tightened labor markets. Conversely, a continuation of the Asian crisis should give us pause in assuming that our economy will remain robust indefinitely. As a consequence, we must be vigilant to the re-emergence of destabilizing influences--both higher inflation, and shortfalls in demand and decreases in some prices that would press the disinflation process too far, too fast.
One very favorable aspect of our economic performance over the past few years has been the remarkable improvement in the federal budget picture. The deficit dropped to its lowest level in more than two decades in fiscal 1997, and yesterday the Congressional Budget Office (CBO) released projections that show the budget remaining essentially in balance over the next few years, moving to annual surpluses equal to 1 percent of gross domestic product by the middle of the next decade. The reduction in federal borrowing to date and in prospect is already paying off for the U.S. economy by helping hold down long-term interest rates and, in turn, providing support to private capital spending and other interest-sensitive outlays.
But much hard work remains to be done to ensure that the projected surpluses actually materialize and that we remain on track to address our longer-run fiscal and demographic challenges. The CBO projections provide a good starting point: They are based on sensible economic and technical assumptions and thus offer a reasonable indication of how the budget is likely to evolve over the next ten years if economic conditions remain favorable and current budgetary policies remain in place. But, as the CBO highlights in its latest report, such forecasts are subject to considerable error. Indeed, as recently as last winter, when fiscal 1997 was already well under way, both the CBO and the Office of Management and Budget were still overestimating that year's deficit by more than $100 billion. …