Fed officials were "removing something which we knew had to be temporary, and one tries to remove it as rapidly as possible with the obvious caveat that should the economy show signs of weakening, clearly we would respond," Greenspan said in response to questioning.
But now, he added, "our judgment . . . is the economy is moving forward at a reasonably good pace."
Federal Reserve Chairman Alan Greenspan completed two days of congressional testimony yesterday.
(Kevin Wolf -- AP)
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Some analysts had speculated that the Fed might pause after raising the rate to 2 percent in December, but it kept going and appears likely to lift the rate again by another quarter-point at the next policymaking meeting, in March.
But as the policymakers decide whether to raise the rate again at their following meeting in May -- when another quarter-point increase would put it at 3 percent -- members of the Fed's top policymaking group are likely to ponder several of the factors that clearly puzzle their chairman.
Greenspan said, for example, that he cannot fully explain why long-term rates, which are determined by the markets, are lower now than they were when the Fed started raising the funds rate. Mortgage rates, for example, are still below what they were in June.
He listed a number of possible explanations, but concluded that it remains a "conundrum." That leaves Fed officials to wrestle with the question of whether low long-term rates are a temporary "aberration," as he said may be possible, or a sign that they need to raise the funds rate more aggressively to tighten credit conditions.
Greenspan could not explain lingering business caution about investment and hiring, but speculated that it might reflect anxieties about potential legal problems.
He said inflationary pressures will greatly depend on labor costs, but they are usually linked to the rate of growth of productivity -- output per hour -- which is extremely difficult to predict.
Fed officials also have not agreed on how high the federal funds rate should go. They generally want to lift the rate closer to a "neutral" level that would neither stimulate nor slow economic growth, but they disagree about what that level would be.
Greenspan declined to say what would be a neutral rate because it varies with economic conditions.
