Forecast Due : Fed Chief May Sound Alarm on Inflation

Federal Reserve Board Chairman Alan Greenspan unveils his new economic forecasts to Congress today amid speculation that the central bank will have to raise interest rates soon to tame the threat of inflation.

“The chairman will utilize a significant portion of his testimony to emphasize that inflation is a definite threat and that vigilance on the price front is required,” William Sullivan, an economist with Dean Witter Reynolds Inc. in New York, said.

The worries about inflation spring from the surprising resilience of the economy. After shrugging off October’s stock market crash, the economy grew at a 3.6% rate from January to March and, according to most evidence, continues to expand strongly.

Employment figures released Friday showed that the nation’s jobless rate fell to a 14-year low in June of 5.3%, heightening fears on Wall Street that the Fed would have to restrict credit to prevent the economy from overheating.

Greenspan is expected to disclose that the Fed, which initially expected the economy to grow 2% to 2.5% this year, has raised its forecast closer to the White House’s updated projection of 3%.

The central bank has already pushed short-term interest rates up by about a percentage point this year, to around 7.5%, but the screws have been tightened only gradually.

Because the independent Fed tries to keep a low profile in an election year, economists expect any further moves will also be modest. They do not look for a rise in the psychologically important discount rate, the fee the Fed charges banks for emergency loans.

“We’ll see more of this Greenspan-esque monetary policy of responding in a gradual, cumulative way to new signs of strength in the economic indicators,” predicted Paul Boltz of T. Rowe Price Associates, a Baltimore money management firm.

Like many investors who fret that rising prices will erode the value of their money, Boltz would like the Fed to clamp down harder on inflation. Greenspan’s predecessor, Paul A. Volcker, would have raised the discount rate by now, he said.

“The Fed is going to have to prove itself every week,” Boltz said. “The credibility that the Fed built up as an inflation fighter under Volcker is not something that Greenspan automatically inherited.”

Others, however, believe this criticism is unfair. The Fed’s steady hand on the tiller has helped the economy to chalk up 68 consecutive months of growth, a peacetime record, while keeping inflation fairly low around 4%.

And it was Greenspan, a keen student of financial history, who pumped a huge volume of cash into the banking system on the day after the stock market crash to drive interest rates lower and bolster investor confidence.

In doing so, many believe, he avoided the mistakes that the Fed made in 1929, when, by clamping down on the money supply, it starved the economy of cash and turned the Wall Street crash into the Great Depression.

“In my book, Greenspan would get an A-minus. He’s done a superb job so far,” said Sam Kahan, an economist with Kleinwort Benson Government Securities Inc. in Chicago.