USA Today
and the Associated Press

WASHINGTON - Federal Reserve Chairman Alan Greenspan said Wednesday that the U.S. economy is set for vigorous growth, although inflation and hiring remained tepid enough that the central bank can remain patient about raising interest rates.

He told a House panel that historically low rates "will not be compatible indefinitely" with the Fed's mission of fighting inflation, and warned that soaring budget deficits could cause economic problems "in the relatively near term."

"Last year appears to have marked a transition from an extended period of subpar economic performance to one of more vigorous expansion," Greenspan told the House Financial Services Committee in his semiannual report on the economy. "Looking forward, the odds of sustained robust growth are good."

Greenspan also warned that mushrooming federal budget deficits eventually could threaten the national economy, which he said had shown "impressive gains."

Greenspan offered an upbeat assessment on the economy and expressed hope that companies would step up hiring. Hiring has been painfully slow and become a sore spot for President Bush.

Against that backdrop, Greenspan reaffirmed the Fed's stance that it would be patient in considering possible increases in short-term interest rates, which now are at a 45-year low of 1 percent.

Investors, having sat on the sidelines for weeks amid uncertainty about the economy, responded with a wave of buying. The Dow Jones Industrial Average gained 123.85, or 1.2 percent, to 10,737.70. It was the highest the Dow has been since June 13, 2001, and is less than 1,000 points shy of the index's record close of 11,722.98, set Jan. 14, 2000.

Broader stock indicators also rose sharply. The Standard & Poor's 500 index was up 12.22, or 1.1 percent, at 1157.76. The Nasdaq Composite Index climbed 14.33, or 0.7 percent, to 2089.66.

Still, Greenspan indicated that the Fed would remain vigilant against inflation. Some private economists think that the Fed could start nudging up rates this year.

Greenspan tempered his optimism with a dose of caution about the dangers of budget deficits.

Last week, the Bush administration projected that this year's deficit will reach a record $521 billion.

"Federal budget deficits could cause difficulties even in the relatively near term," Greenspan told the House Financial Services Committee.

That view is at odds with the administration, which has argued that the deficits pose no immediate threat of pushing interest rates higher.

The administration has pledged to cut the deficit in half in the next five years.