Fed Governor Says New Hikes Not Certain : Economy: Lindsey’s remarks calm the bond market. But he warns that price pressures could nudge interest rates again.

Federal Reserve Board Gov. Lawrence Lindsey said Monday that he hopes the recent rise in short-term interest rates will keep inflation at bay, but he warned that another upward push may be needed if price pressures build in the moderately expanding economy.

“Hopefully, one quarter-point is going to solve the problem,” Lindsey said at a meeting of the Credit Union National Assn.

His remarks were the first indication from a Fed policy-maker that the central bank may not have to continue nudging interest rates higher over the coming year--if early signals of potential price problems abate.

The jittery bond market calmed on the news.

Bond prices have been dropping, and interest yields rising, since the Fed in early February surprised markets by pushing up the federal funds rate a quarter of point to 3.25%. It was its first upward move in five years.

Fed Chairman Alan Greenspan has been warning that further increases may be needed to keep the economy growing steadily without inflation sapping its strength.

Many market analysts interpret this to mean the federal funds rate, the only measure the central bank directly controls, will rise to 4% by the end of the year.

The Fed uses the rate to increase the cost of money throughout the economy. It does so by reducing cash in bank reserve accounts, which forces banks to charge each other more for short-term liquidity loans, known as federal funds. This pushes up rates across the spectrum.

Reflecting the expectation for gradually increasing rates, the bond market has fallen in the past three weeks.

This has pushed up the yield on the bellwether 30-year Treasury issue to about 6.7%--its highest level in seven months.

Lindsey’s encouraging remarks on the outlook for monetary policy, combined with an economic report suggesting inflation was well-behaved in February, gave the market some confidence.

The Chicago purchasing managers index, a gauge of the health of the manufacturing industry, edged up slightly to 60.3 in February from 59.6 the prior month. But its inflation component dipped to 56.7 from 59.3.

Lindsey did not rule out further Fed action on rates.

He said he agrees with Greenspan that interest rates are more likely to head up than down, but he said he doubts there will be a rise on the magnitude of the 4% increase seen in the federal funds rate in 1988 and 1989.

“I have every hope and every expectation that preemptive action on our part will keep us well below that rate of increase,” Lindsey said.

He said the Fed pushed up the federal funds rate Feb. 4 because it saw “precursors of what might be inflation down the road,” not because prices were in imminent danger of getting out of control.

These early warning signals included rising commodity prices and tightness in specialized labor markets, especially in the Midwest. If the Fed had waited much longer, price pressures may have burst forth, he said.