Federal Reserve Chairman Alan Greenspan said Tuesday that interest rates will remain high unless Congress and the administration do a credible job of cutting the budget deficit.
"The budget deficit must be brought down. While it is beguiling to contemplate the healthy growth of recent years in the context of large budget deficits, it is fanciful to conclude that these deficits have no adverse consequences," Greenspan told the Senate Budget Committee."Allowing deficits to persist courts instability in the near term and threatens potentially significant reductions over time in the United States standard of living," he said in his first congressional appearance since the Fed boosted its key bank lending rate last Friday.
The economy, according to the Fed's reading, is in danger of overheating. Retail price inflation, at an already-too-high 4.4-percent in 1987 and 1988, could ratchet higher because of tight labor markets and strained factory capacity, Fed officials believe.
Greenspan said, "Large budget deficits contribute to the (inflation) problem; they tend to put inordinate strains on financial markets and they directly fuel excess demand on resources."
On Friday, the Fed sent a dramatic signal of its intent to keep inflation under control by increasing its discount rate, the interest charged member banks for short-term loans, from 6.5 percent to 7 percent, the highest level in three years.
Sen. James Sasser, D-Tenn., chairman of the budget panel, called the increase "an unmistakable message to the president and the Congress that we better put our fiscal affairs in order." However, he added, "I am afraid that the message is simply not being heard."