ICS Magazine

Greenspan Says Rate Hikes May Accelerate

July 21, 2004
WASHINGTON (AP) -- The Federal Reserve is ready to raise interest rates more quickly than its current "measured" pace if inflation suddenly worsens, chairman Alan Greenspan said Tuesday.

Still, Greenspan delivered a generally upbeat assessment of economic prospects to Congress, seeking to allay concerns that a pronounced dip of economic activity in June could turn into something more severe. He said a slowdown in consumer spending, which accounts for two-thirds of the total economy, appeared to be "short-lived," with preliminary indications that July growth was already rebounding.

The economy was moving through a "soft patch," based on a number of weaker-than-expected statistics in June, he said.

Delivering the Fed's midyear economic outlook to the Senate Banking Committee, Greenspan said that in most respects economic conditions through the first half of the year have "been generally quite favorable," with overall growth at a strong rate that has finally generated a significant rebound in job growth.

He did say inflation figures had risen, but he attributed much of the increase to "transitory factors" such as a spike in oil prices.

On June 30, the Fed, for the first time in four years, boosted its target for the federal funds rate, the interest that banks charge each other on overnight loans, by a quarter-point to 1.25 percent, up from a 46-year low of 1 percent.

The fed said further rate increases would likely be "measured."

Economists have interpreted the word "measured" as meaning the central bank will boost rates in a series of quarter-point moves at its regular meetings for the rest of this year and into 2005, aiming to get the funds rate up to around 4 percent, a so-called neutral level that would neither stimulate economic growth nor hold it back.

Analysts said they heard nothing from Greenspan on Tuesday to make them change their forecasts.

"Expect rate hikes to continue at a measured pace, but if inflation accelerates all bets are off," said Joel Naroff, head of Naroff Economic Advisors.

Greenspan said the Fed had two general scenarios in mind for its rate increases. In one, inflation remains contained and the Fed can move slowly to raise rates. In the other, the central bank has to accelerate its rate hikes to battle rising prices.

"If the economy shows signs of exhibiting significant inflationary pressures, ... if we are to maintain the mandate which the Congress has given us to create price stability ... we will do what is required to achieve that objective," he said.

As long as price pressures moderate in coming months and don't threaten to become embedded in wages, Greenspan said the Fed feels it can continue to raise interest rates "at a pace that is likely to be measured."

Greenspan assured senators that the Fed was closely monitoring economic developments both on growth and inflation in calibrating its next rate moves. Consumers and nearly a half-century as the Fed battled the adverse impacts of the 2000 stock market collapse, a recession, the 2001 terrorist attacks and a series of corporate accounting scandals. businesses have been enjoying a period of the lowest interest rates in

Greenspan said the extended period of low rates had allowed consumers to cut their monthly mortgage payments by refinancing and enabled businesses to consolidate their debts as well, leaving them in better position to face higher rates.

The Fed chief said the economy would probably be able to handle the adjustment to higher rates even if the Fed must move rates up more rapidly. But he cautioned that such a scenario would bring "considerably more uncertainty and hence risk" to the economy.

In his appearance before the Senate panel, Greenspan delivered the Fed's updated economic outlook for 2004 showing that the central bank has slightly raised its expectations for inflation while trimming its forecast for growth.

The Fed predicted the economy would grow between 4.5 percent and 4.75 percent this year as measured from the fourth quarter of last year with inflation, as measured by one price gauge that factors out energy and food costs, rising by 1.75 percent to 2 percent.

The Fed left its outlook for unemployment unchanged at 5.25 percent to 5.5 percent by the end of this year. The jobless rate currently is 5.6 percent.