US Federal Reserve chairman Alan Greenspan yesterday contrasted the bright economic outlook with a lack of budget discipline in Congress and looming fiscal problems yesterday.
Appearing before the Senate budget committee, Mr Greenspan made upbeat remarks on the economic outlook. He said the US economy delivered solid performance last year.
"Thus far this year activity appears to be expanding at a reasonably good pace," he said.
A combination of weaker recent data releases and stock market weakness has raised questions about the Fed's relatively optimistic outlook. Confidence in growth has led the central bank to focus on inflation risks.
Mr Greenspan said the US economy was not heading towards 1970s-style "stagflation", the term economists use to describe the combination of sluggish growth and inflation.
Mr Greenspan, who leaves his post next January after 18 years at the helm of the US central bank, said: "The positive short-term economic outlook is playing out against a backdrop of concern about the prospects for the federal budget, especially over the longer run."
Mr Greenspan told lawmakers the federal budget was "on an unsustainable path", where big deficits push up interest rates and ever-increasing interest payments. The danger was that shortfalls would keep rising as a percentage of economic output.
"Unless that trend is reversed, at some point these deficits would cause the economy to stagnate or worse," he said, and it wouldn't improve unless some action was taken.
He repeated his call for Congress to reinstate budget rules needed to "signal a renewed commitment to fiscal restraint and help restore discipline to the annual budgeting process".
Mr Greenspan has long called for the reinstatement of the "pay-go" rules that require any tax cut or spending increase to be offset elsewhere in the budget - a demand that has been ignored by Congress and by the White House.
He also repeated his call for a "well-designed set of mechanisms" to allow "mid-course corrections" that would help in bringing the budget back towards balance when economic projections turn out to be incorrect.
The outlook of large budget surpluses in the next decade, which the Bush administration inherited, has turned into an outlook of red ink - in large part the result of the tax cuts passed in George W Bush's first term.
Mr Greenspan repeated his call for action on the short-term fiscal deficit and the long-term problems associated with Medicare and social security.
On China, he said the policy of pegging the renminbi was starting to hurt the economy, leading to distortions.
"As far as I'm concerned, it's very much in their interest to move," he said. "And as you can well imagine, we in the United States government have been in conversations with them to indicate that in our judgment and in our experience, they should be moving sooner rather than later."
