Federal Reserve Chairman Alan Greenspan delivered an optimistic outlook on the economy Wednesday, saying that it "seems to have entered 2005 expanding at a reasonably good pace, with inflation and inflation expectations well anchored." He said there was a sense of confidence among investors as shown by a number of financial indicators.

Speaking before the Senate Banking Committee, the Fed chairman also urged for action on Social Security and Medicare before 2008, when the first of the Baby Boomers will begin to retire. However, he called for the transition to be done slowly and cautiously, with the transition costs in mind. "If you're going to move to private accounts, which I approve of, I think you have to do it in a cautious, gradual way," he said.

While he did not say if the Fed would continue to raise interest rates at a measured pace, Greenspan said the rate of the growth of productivity would help determine the inflation outlook in the future. A prolonged slowdown in productivity would push labor costs upwards, Greenspan said, but he added that whether or not this would lead to inflation would depend on how much slack there was in the economy and how monetary policymakers responded to it.

The chairman said overall inflation, core inflation and the Fed's fund rate have remained low. The Fed has raised the funds rate to 2.5% from 1% last June but long-term rates in the bond market have dropped in response, at which Greenspan expressed puzzlement.

In light of the increasing current account deficit, Greenspan asked for greater national savings and increased fiscal discipline in Washington.

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.