Federal Reserve Chairman Alan Greenspan said today that with the US economy on a "reasonably firm footing" and underlying prices tame, policy-makers should be able to raise interest rates at a measured pace.
"Despite some of the risks that I have highlighted, the US economy seems to be on a reasonably firm footing, and underlying inflation remains contained," Mr Greenspan said in testimony prepared for the congressional Joint Economic Committee.
"Accordingly, the Federal Open Market Committee in its May meeting reaffirmed that it '...believes that policy accommodation can be removed at a pace that is likely to be measured,'" he added.
He said most recent data support the view that soft readings on the economy in early spring "were not presaging a more-serious slowdown in the pace of (economic) activity."
US Treasury prices eased and the dollar weakened on the closely watched testimony, which economists said heralded a continuation in the Fed's rate-rise campaign.
"He's telling you that they're not going to stop tightening," said Steve Ricchiuto, chief US economist at ABN AMRO in New York.
The Fed chief noted that slower growth in productivity -- or hourly worker output - was pushing up US labour costs and said it was an "open question" whether the rise would feed into inflation or hit corporate profits.
"Evidence of increased pricing power can be gleaned from the profit margins of nonfinancial businesses, which have continued to press higher even outside the energy sector.
Whether that rise in unit costs will feed into the core price level or will be absorbed by a fall in profit margins remains an open question," Greenspan said.
The Fed chairman repeated that while he did not think a nationwide housing price bubble was likely, there did appear to be signs of froth in some local markets where home prices seem to have climbed to unsustainable levels.
"Although we certainly cannot rule out home price declines, especially in some local markets, these declines, were they to occur, likely would not have substantial macroeconomic implications," Mr Greenspan said.