By Nell Henderson
Washington Post Staff Writer
Thursday, June 9, 2005 11:29 AM

Federal Reserve Chairman Alan Greenspan said today that the U.S. economy is generally healthy but faces several risks, including the possibility that surging home prices could fall in some local markets.

Such declines probably would not harm the overall economy, he said during remarks before Congress's Joint Economic Committee.

But some newer, riskier types of mortgages gaining popularity, such as interest-only loans, "are developments of particular concern," and appear to be driving some of the home price increases, Greenspan said.

He repeated that he does not see a national housing "bubble," but he does see "signs of froth in some local markets where home prices seem to have risen to unsustainable levels."

"We certainly cannot rule out home price declines, especially in some local markets," he added.

Greenspan indicated that the Fed intends to continue gradually raising interest rates in the months ahead to keep inflation under control.

"The U.S. economy seems to be on a reasonably firm footing, and underlying inflation remains contained," he said. Therefore, rates can be lifted "at a pace that is likely to be measured."

Still, he said it "remains an open question" whether rising labor costs will push inflation higher, he said, an indication that the Fed remains worried about building price pressures.

The Fed has raised its benchmark short-term interest rate to 3 percent from 1 percent over the last year, through a series of eight increases of a quarter-percentage point each. While investors have come to think "measured" means no more than a quarter-percentage point, Greenspan reemphasized that Fed officials nonetheless may raise the rate more aggressively or leave it unchanged, depending on how the economic expansion unfolds.

Fed officials are likely to raise the benchmark rate to 3.25 percent at their meeting at the end of this month. Investors and analysts widely predict the Fed will raise the rate again to at least 3.5 percent before the end of the year.

Greenspan noted that the pace of economic growth has been uneven over the last year, characterized by spurts and pauses, in part because of swinging oil prices, which have receded a bit since topping $57 a barrel in early April.

But overall, "the U.S. economy has done well, on net, by most measures," he said, with output expanding 3.7 percent and unemployment falling to 5.1 percent over the past year.

At the same time, he said, the economy faces a number of risks posed by "imbalances and uncertainties, he said.

These include the housing market froth, the nation's "negligible" saving rate, the lack of progress made toward addressing the economic challenges posed by the pending retirement of the baby-boom generation, and the nation's growing trade deficit, he said.