Fed May Push Interest Rates Up, Greenspan Tells Congress : Says Agency Is Ready to Move Against Inflation

Federal Reserve Chairman Alan Greenspan confirmed today that the central bank has undertaken a series of steps to tighten credit in recent months and said the Fed is ready to push interest rates higher to dampen inflationary pressures.

Greenspan warned of growing signs of price pressures stemming from such factors as the severe drought, tight labor market and high industry operating rates.

“The costs to our economy and society of allowing a more intense inflationary process to become entrenched are serious,” Greenspan said in testimony today before the Senate Banking Committee.

“As the experience of the last two decades has clearly shown, accelerating wages and prices would have to be countered later by quite restrictive policies, with unavoidably adverse implications for production and employment,” Greenspan said.

Recession Fears

That comment was an obvious reference to the severe 1981-82 recession brought on by Greenspan’s predecessor, former Fed Chairman Paul Volcker, as a way to fight the double-digit inflation that plagued the country at the beginning of the decade.

Greenspan gave no indication that the central bank is planning anything close to the tight-money policies pursued by Volcker. But Greenspan said that the Fed did intend to err on the side of tighter credit conditions rather than to worry that Fed policy could be too restrictive and thus harm long-run growth prospects.

“The long-run costs of a return to higher inflation and the risks of this occurring under current circumstances are sufficiently great that Federal Reserve policy at this juncture might be well advised to err more on the side of restrictiveness rather than stimulus,” he said.

Mid-Year Report

Greenspan’s comments came in his mid-year report to Congress on the central bank’s conduct of monetary policy and its economic outlook.

The remarks were not a complete surprise. Financial markets have been expecting another slight tightening of credit conditions in coming weeks because of continuing evidence that the U.S. economy is growing rapidly. The latest such information came Friday, when the government reported that the jobless rate fell to a 14-year low of 5.3% in June.

The tightening process has pushed a variety of interest rates, including mortgage rates, higher in recent months. Banks raised their prime lending rate, which serves as a benchmark for many consumer loans, to 9% in May, and many economists are expecting another half-percentage-point increase in the prime rate.

Immediately after the Oct. 19 collapse of the stock market, the Fed began an aggressive credit-easing process to ensure that the market turmoil would not topple the country into a recession.

When Greenspan last appeared before Congress in February to discuss monetary policy, he said that the central bank was still easing credit conditions. He said then that he believed the dangers of a recession or higher inflation were about equal.