Greenspan Hints Fed May Yet Again Hike Interest Rates : Economy: But analysts say his mild remarks on inflation could lead the central bank to forgo any immediate action.

WASHINGTON —  The nation’s economy remains fundamentally sound, but the potential for inflation continues to be a concern, Federal Reserve Board Chairman Alan Greenspan told Congress on Wednesday, leaving the door open for yet another interest rate hike next week.

For the first time in more than a generation, the economy has come close to achieving long-term, non-inflationary growth, Greenspan said. Economic growth has now reached all parts of the country and all portions of the population, he added.

“Notably, California, accounting for roughly an eighth of the nation’s economy, appears to be in the process of turning around,” he said. “Even Southern California, which has been for a while the weakest part of the American economy, is showing signs of picking up.”

But Greenspan told members of the Senate Finance Committee that “there are reasons for some concern, at least with respect to the nearer term,” that inflation could revive because of the rapid pace of growth during the last year.

“It may be that these pressures will lead to some deterioration in the price picture in the near term, but any such deterioration should be contained if the Federal Reserve remains vigilant,” he said.

Wall Street had been widely expecting another hike in short-term interest rates when the Fed’s Open Market Committee meets next week. But analysts who specialize in reading the nuances of Greenspan’s elliptical public remarks said his warnings about inflation were more mild than in the past--raising the possibility that he and his colleagues may decide to leave rates unchanged for now.

In response to a direct question from the Finance Committee, Greenspan said he wasn’t sure whether the Fed needs to raise rates next week.

Among other reasons for a delay, some analysts suggested, is concern that another rate increase could raise the cost of stabilizing the economy of Mexico--a goal championed by Greenspan and Clinton Administration officials.

Nearly all analysts expect, however, that at least one more rate increase is coming--if not next week then in the spring. Some analysts expect two more increases before the central bank completes the series of rate hikes Greenspan began a year ago in an effort to slow the economy.

The economy grew roughly 4% last year--a pace most economists believe is too rapid to be sustained over the long run. Greenspan’s goal has been to reduce growth to a level of roughly 2.5%.

“We’re getting close to the end” of the rate increases that Greenspan has used to slow economic growth, said David Wyss of DRI McGraw Hill in Cambridge, Mass. “The Fed thinks it has inflation under control,” he said, but it also believes that “the brakes have to be kept on.”

So far, growth has not slowed. For example, the National Assn. of Realtors reported Wednesday that sales of existing homes rose 4.3% last year, reaching the second-highest level on record even though fixed-rate mortgages have risen to about 9%.

However, most economic forecasters expect that growth will begin to slow by the second quarter of this year as the rate hikes of the past year begin to take hold.

In California, where recovery from the last recession started later than in the rest of the country, the slowdown should also come later, analysts said.

Greenspan voiced mild criticism of moves in Congress to cut taxes, saying that proposals to increase the nation’s savings rate by providing tax incentives--an idea pushed by many Republicans-- have not worked in the past.

Tax cuts are desirable, he said, but “if you’re asking me do I think that deficit reduction is the first priority and tax cuts are second to that, the answer is yes.”

* END OF CYCLE?

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