NEW YORK (CNN/Money) – Federal Reserve Chairman Alan Greenspan told Congress Wednesday the economic recovery has regained some momentum after hitting a “soft patch” amid soaring oil prices.
“The most recent data suggest that, on the whole, the expansion has regained some traction,” the Fed chairman said in a prepared statement for the House Budget Committee. “Consumer spending and housing starts bounced back in July after weak performances in June, although early readings on retail sales in August have been mixed.”
“In the labor market, though job gains were smaller than those of last spring, nonfarm payroll employment growth picked back up in August,” he continued.
Although Greenspan hinted that the economy was beginning to pickup after the soft patch, which he attributed to rising oil prices, he noted that inflation pressures have moderated in recent months.
The Fed chairman’s comments likely clear the way for another rate hike from where the overnight lending rate now stands at 1.5 percent when the central bank meets Sept. 21, the last meeting before the presidential election in November.
The economic recovery has been a focus of debate as President Bush contends his tax cuts averted a sharper recession and eased an economic recovery. The Democratic nominee, Sen. John Kerry of Massachusetts, says the tax cuts primarily benefited the wealthy and exacerbated the budget deficit.
Fed funds futures on the Chicago Board of Trade indicated a quarter percentage point hike at the next meeting and for rates to stand at 2 percent by the end of the year. But Greenspan did not comment on the future direction of interest rates during his testimony.
Despite his optimistic comments, bond prices pared early losses to trade slightly higher, with the yield on the 10-year note at 4.21 percent, down from 4.26 percent before Greenspan began speaking.
A large portion of Greenspan’s statement focused on the budget deficit and the impact from the approaching retirement of baby boomers, an issue he has previously touched upon.
“The fundamental challenge that we face is to come to grips with the adverse budgetary implications of an aging population and current health entitlements and with the limits on our ability to project the likely path of medical outlays,” he said.
When asked to elaborate on that statement during the testimony, Greenspan said “I cannot say we have made comments we can essentially deliver.”
In order to prevent a deteriorating budget deficit situation, Greenspan also mentioned that a series of measures to keep the budget in line with expectations may be helpful.
“More generally, mechanisms, such as triggers to bring the budget back into line if it goes off track, should be considered, particularly measures that force a mid-course correction when estimated future costs for a program or tax provision exceed a specified threshold,” the Fed chairman said.
Greenspan added during the testimony that within a balanced budget, he favors lower taxes and lower spending.
Although the Fed chairman indicated that the financial markets have ignored the budget deficit impact to date, projections for a increasing gap concern some economists as the increased interest payments squeeze out investment spending.
One of those measures Greenspan alluded to in his testimony before the committee was a “pay-go” system.
When asked by Rep. Richard Neal, D-Mass., about whether the United States can pay for a war in Iraq while meeting the rest of the nation’s needs, Greenspan noted “I think you’re making the case for a ‘pay-as-you-go’ system. There would have to be some choice between projects A and B.”