Economists also expect renewed caution on social programs, barrage of politically loaded questions.
September 7, 2004: 12:16 PM EDT
WASHINGTON, Sept 7 (Reuters) - Federal Reserve Chairman Alan Greenspan will cement forecasts for higher U.S. interest rates when he speaks Wednesday. This follows publication of August jobs data, which backed his view that growth is back on solid ground, economists said.
Greenspan testifies on the economic outlook to the House of Representatives Budget Committee at 10:30 a.m. in his only slated public appearance before the U.S. central bank's Sept. 21 policy meeting, which is expected to consider further rate hikes.
Analysts polled by Reuters Friday were unanimous in forecasting a quarter-percentage point rise that would take U.S. rates to 1.75 percent, as the Fed sticks to a campaign of gradual increases amid a widening economic expansion.
"He will indicate that the economy is still on a solid growth track and that the Fed will continue in a measured way to move interest rates up," said David Jones, head of consulting group DMJ Advisors.
Greenspan will also likely repeat his concerns about the risks that an aging population poses to the country's social security safety net.
In addition, Democrats on the committee will ask Greenspan politically loaded questions that are critical of President George W. Bush's tax cuts and a massive budget deficit, which are hot topics as the presidential election race enters its last eight weeks.
Pay day
But financial markets will be tuned closely to the economic outlook, after a brighter August payrolls report Friday supported Fed views that a soft patch seen in U.S. second-quarter growth was temporary and has since recovered.
The Labor Department said 144,000 new jobs were created in August, and June and July's numbers were also revised slightly higher, although job growth remained tepid.
Financial markets bet the U.S. central bank will raise rates at two of its next three policy meetings, to take the target Fed funds rate to 2.0 percent by the end of the year.
But mixed data from big retailers like Wal-Mart (WMT: Research, Estimates) and major automakers warn that the economy may not be entirely out of the woods. Greenspan is expected to remain mindful of this threat.
"It appears that the pause was temporary, and he will suggest that is the case. But it is too early to declare victory," said Lynn Reaser, chief economist at Bank of America Capital Management in St Louis, Missouri.
Markets believe the Fed will put its tightening campaign on hold, if the soft spot spills decisively into third-quarter growth. This view has been stoked by Fed officials, who have signaled they will be flexible in reacting to the data.
Gov. Ben Bernanke said on Aug. 10 the Fed "has some scope to respond to the weakening of the economy associated with an oil-price rise," provided inflation remains contained.
Sharp prices rises earlier in the year alarmed some Fed policy-makers. But recent news has been more encouraging, with the core measure of inflation faced by consumers, the PCE price index -- one of the Fed's favorite price pressure measures -- running at 1.5 percent year-over-year in July.
Greenspan will probably avoid speaking too emphatically of the recovery, because he wants to preserve room for policy maneuver and because he does not want long-term market interest rates to rise too quickly in anticipation of future Fed action.
This could create unwelcome headwinds for the expansion, for example by undermining mortgage refinancing activity, which has been an important support for consumer spending, despite the economy's at times disappointing record in creating new jobs.
"He is very worried that obsessing about inflation can knock the recovery off track," said Jones.
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