Federal Reserve chair Alan Greenspan warned Thursday that the United States the massive federal deficit poses a risk to the health of the U.S. economy.

“The U.S. economy delivered a solid performance in 2004, and thus far this year, activity appears to be expanding at a reasonably good pace,” Greenspan said in a prepared statement as part of his testimony before the Senate budget committee.

“However, the positive short-term economic outlook is playing out against a backdrop of concern about the prospects for the federal budget, especially over the longer run,” he said.

The U.S. government ran a record deficit of US$412 billion US last year, and is expected to top that with an estimated deficit of US$427 billion.

The federal budget is on an unsustainable path, Greenspan said, “in which large deficits result in rising interest rates and ever-growing interest payments that augment deficits in future years.”

Rising interest rates affect the willingness of consumers and businesses to borrow. If they hold off on their spending, it would depress economic activity.