Fed Chief Hints at New Rate Hikes

Federal Reserve Chairman Alan Greenspan, in congressional testimony that suggested the likelihood of further interest rate increases, said Wednesday that inflationary pressures are mounting even though consumer prices have risen little in the past year.

Commodity prices “have been rising rapidly for nearly two years,” Greenspan told the Joint Economic Committee, and lately “prices of intermediate supplies have accelerated.”

Because demand is “strong, finished goods producers may soon attempt to pass on their higher costs,” the Fed chairman said, warning that business officials and consumers alike are always hypersensitive to any signs of renewed inflation.

Surveys and the financial markets themselves show “some nervousness about the resolve of anti-inflation policies,” Greenspan acknowledged.

In another sign of governmental vigilance against inflation, the incoming chairman of the Joint Economic Committee said congressional Republicans will try to revise the law spelling out national economic goals to exclude unemployment and include only prices.

Sen. Connie Mack (R-Fla.) said Republicans want the so-called Humphrey-Hawkins law, which now urges a combination of low unemployment and low inflation, to have only a single target: consumer price inflation of no more than 2% a year.

Inflation measured by the consumer price index is running at a modest 2.6% a year, but the bond markets have set long-term rates at a substantial 8% as a hedge against future price increases.

The Fed cannot afford to ignore the markets, which “may be telling us something about deep-seated changes in expectations,” Greenspan said.

The central bank has raised rates six times this year, and its policy-making Open Market Committee will meet Dec. 20 amid expectations that another hike could be in the works.

Sen. Paul S. Sarbanes (D-Md.) asked Greenspan not to be the Grinch who stole Christmas by hiking rates again.

The normally dour Fed chairman laughed, but refused to hint what action his committee might take at the next meeting.

“I don’t know what we will do,” Greenspan said.

Sarbanes, persisting in his literary allusions, said “Let’s hope you’re not going to be Ebenezer Scrooge.”

Greenspan insisted during more than two hours of testimony and questions that the Fed would not let down its guard against a resurgence of inflation, because further inflation could become a self-fulfilling prophecy.

“As people begin to expect higher inflation, their actions to protect the purchasing power of their wages and profits add to the impetus toward accelerating prices,” he said.

“Experience suggests that these expectations can be turned around only slowly and with some cost to the economy’s performance,” Greenspan said.

The Fed chairman and his colleagues feel confident that they can continue in their efforts to combat inflation because their actions thus far haven’t endangered the robust round of business expansion now under way. Output has grown more than 4% during the past year, and unemployment is at a four-year low.

“The impressive performance of the American economy continues,” Greenspan told the committee.

His claims were supported by the Fed’s “beige book,” a periodic survey of economic conditions in the nation’s 12 Federal Reserve districts.

The report issued Wednesday said that “retail sales in most districts have improved, with nearly all districts reporting strong sales early in the holiday season.

Manufacturing activity is continuing to increase further in most districts, especially in durable goods industries, and the service sector is continuing to show strength.”

The report from the West was less enthusiastic, noting only a “slight pickup in growth” in California. However, it said business leaders “generally remain optimistic” in the region.

Outside the depressed aerospace sector, manufacturing activity in California remained at high levels, the economic report found.

Nationally, prices are rising for paper products, plastics, chemicals, steel and construction materials, the report noted, and there is some tightening in labor markets, particularly in the Midwest.

As Greenspan testified, however, manufacturers have not yet been able to pass along their higher costs in the form of higher retail prices.