Greenspan Says Fed Is Ready to Hike Rates
Federal Reserve Chairman Alan Greenspan said Tuesday that the U.S. central bank was ready to raise interest rates and would accelerate the pace of increases if inflation picked up.
The Federal Open Market Committee “is prepared to do what is required to fulfill our obligations to achieve the maintenance of price stability” and ensure maximum sustainable economic growth, Greenspan told an international monetary panel in London.
The yield on U.S. Treasury notes due in two years, the most sensitive to expectations for monetary policy, rose to the highest level since July 2002 as traders priced in the possibility that the Fed could raise rates more quickly. Investors have pushed up government debt yields since mid-March on concern that the Fed may be too slow to stem inflation, eroding the value of fixed-income payments.
“The last thing anyone should want is for the Fed to allow itself to fall substantially behind the curve,” said Stephen Stanley, chief economist at RBS Greenwich Capital in Connecticut. “Greenspan is certainly not ready to push the inflation panic button, but his attitude seems to be more open-minded and thus he will probably be willing to shift the rate hikes to a higher gear if that becomes necessary.”
The U.S. economy is strong enough to handle a “slight increase” in rates, a senior Bush administration official told reporters at the Group of 8 summit in Sea Island, Ga.
Economists expect inflation to rise. Consumer prices probably will jump 2.7% this year, the most since 2000, according to the median forecast of 45 economists polled by Bloomberg. Last month, economists expected inflation to rise 2.3%. Consumer prices rose 1.8% in the 12 months through April.
The commitment by the Federal Open Market Committee to a “measured” rise in rates, set forth in a May 4 policy statement, is conditional, Greenspan told the London panel via satellite, and can be revoked if the central bank’s judgments “prove misplaced.”
Greenspan sought to reassure investors that the Fed was not setting them up for a repeat of 1994, when the central bank started tightening monetary policy with quarter-point increases in the overnight banking lending rate, only to follow with bigger increases to stem inflation. The Fed raised the overnight lending rate to 5.5% that year from 3% at the start of 1994.
Federal funds futures contracts show that traders expect the U.S. central bankers to raise the overnight lending rate by a quarter-point June 30 at the end of their two-day meeting.
The Fed, which May 4 left the rate unchanged near a 46-year low at 1%, has “provided ample liquidity to the financial system that will become increasingly unnecessary over time,” Greenspan said in his speech.
