Low inflation, brisk growth postpone need to hike interest rates.

Federal Reserve Chairman Alan Greenspan isn't only about as happy as he gets, he's apt to stay that way for quite a while.

Of course, the next move on interest rates will be up, Greenspan told Congress last week. However, he gave no hint such action will need to come anytime soon, because while the U.S. economy is growing briskly, inflation is almost nonexistent.

He even made the "patient" wording of the Federal Open Market Committee's last statement more emphatic.

"With inflation very low and substantial slack in the economy, the Federal Reserve can be patient in removing its current policy accommodation," Greenspan said.

In Fedspeak, every word matters. The statement issued after the Jan. 28 FOMC meetings said inflation is "quite low," rather than Greenspan's "very low." More importantly, the committee said it could be "patient in removing its policy accommodation."

Since the FOMC's target for overnight rates could still be accommodative if it were somewhat higher than today's 1 percent, some analysts took that wording to suggest a rate increase might come fairly soon. Greenspan inserted the key word "current," taking that interpretation off the table.

Lower inflation expected

The latest collective forecasts of his 18 colleagues on the FOMC, which he provided, show that most of them expect a further decline in inflation this year. They also are looking for only a very modest drop in unemployment by year's end.

Given that benign outlook, why shouldn't Greenspan be happy?

The Fed's aggressive policy of rate cuts beginning in January 2001 clearly cushioned that year's recession and played a major role in helping the economy finally regain solid footing. Moreover, as he noted, productivity is surging, household and business balance sheets are in good shape, business profits and investment are up, the huge current account deficit is being comfortably financed and the dollar's decline remains orderly.

He even brushed aside complaints by some that the Fed--by keeping its target for overnight interest rates at 1 percent, effectively zero in real terms--has pumped too much liquidity into the economy.

Greenspan's only harsh words were devoted to the incredibly poor outlook for the federal budget, which he warned could cause "even in the relatively near term, an appreciable backup in long-term interest rates."

While Greenspan expressed his pleasure at the way the surge in productivity has bolstered corporate profits and helped reduce inflation, there was a clear sign he doesn't expect the large gains in efficiency to continue. Partly as a consequence, he expects firms to begin hiring a large number of workers.

"To a surprising degree, firms seem able to continue identifying and implementing new efficiencies in the production processes and thus have found it possible so far to meet increasing orders without stepping up hiring," he said.

That hiring will occur if output continues to expand because, surely, companies must be working off "the stock of inefficiencies that had accumulated in the boom years," Greenspan explained.

Well, maybe.

Fighting lower prices

Managers are laboring in a highly competitive world in which it is extraordinarily hard to raise prices. For many goods producers, it's actually a matter of trying to ward off demands from customers for price reductions.

That has driven many companies to find ways to become more efficient, particularly in the use of labor. In addition, employers are being quite tightfisted about paying higher wages, especially given rising benefit costs. For instance, average hourly earnings rose only 2 percent in the year ended in January, and were up at only a 1.6 percent annual rate during the last three months.

A number of analysts are projecting that total hours worked this quarter will increase at less than a 1.5 percent annual rate, while GDP will rise at more than a 4 percent rate. If so, the economy will chalk up another quarter of strong productivity growth, with every likelihood that unit labor costs will fall yet again.

Even if growth were to accelerate further, or productivity gains were to slow a lot, there is still the question of how low the unemployment rate would have to fall to put notable pressure on wages.

Asked what he considers to be full employment, Greenspan said it's hard to be sure. And he added, "I would not rule out the possibility that it is close down to the 4 percent level."

That's where the rate was at the beginning of the 2001 recession, and inflation was still very low. The Fed forecasts released yesterday put the jobless figure expected for the fourth quarter of this year at 5.25 percent to 5.5 percent.

Greenspan quite properly told the world that sooner or later strong growth would cause the Fed to begin to raise its I percent target. Don't hold your breath.

Berry is a Bloomberg News columnist.