WASHINGTON — The chairman of the Federal Reserve Board said Sunday he would prefer that U.S. officials not resort to a tax increase to stem the growing federal deficit, but admitted that such a tack may be necessary.
"I would very much dislike to see us go in that direction--the tax side," Alan S. Greenspan said on ABC-TV's "This Week With David Brinkley." "But I do recognize that ultimately, if we don't get this resolved, somewhere down the line that may be necessary.
"And I think that would be very regrettable."
The federal budget deficit stands at $157 billion for 1987, according to the Office of Management and Budget and the Congressional Budget Office. In 1986, the deficit hit $220.7 billion, up from the previous year's total of $211.9 billion.
Greenspan also said there are no real signs the United States is entering a period of inflation, but nevertheless he is troubled by fears it may happen.
There appears to be "across the spectrum of financial analysts around the world, a fear that now that we've gotten inflation under control, the next step is to get it out of control again," Greenspan said.
He said this fear had led to what some have called an "inflation premium" on long-term interest rates. "That . . . bothers me. At the moment there just is no sign that inflation is picking up.
"It's quite conceivable that if everybody gets it into his head that inflation is inevitable, they will start taking actions that will create it," he said.
He said rates were raised to curb inflation fears.
"The economy is beginning to tighten. We do see a little bit in the area of labor shortages; there are certain pressures. . . . It is conceivable that at some point the thing could begin to mushroom," requiring higher interest rates to stabilize an economy in danger of breaking apart, he said.
Such conditions could lead to a "tremendous contraction of the economy," he said.
"If we can just basically calibrate a small rise . . . it's quite conceivable we could prevent that type of problem from arising," the Fed chief said.