Archive for Thursday, April 22, 2004

Fed chair readies markets for rate increase

Greenspan cites economic rebound, inflation fears

April 22, 2004


— Federal Reserve Chairman Alan Greenspan said Wednesday extra-low interest rates "must rise at some point" now that the economy is hitting its stride, an assessment reinforcing some economists' beliefs that rates would climb this summer.

Greenspan, testifying before Congress' Joint Economic Committee, delivered one of his most upbeat takes on the economy's health. After a long stretch of subpar growth, the economy finally staged a significant rebound in the second half of last year and is expanding more vigorously now, he said.

Companies also appear more willing to step up hiring, Greenspan said. Following months of lackluster job gains, the economy added 308,000 jobs in March, the most in four years. That raised hope among private economists that the labor market truly may be on the mend.

"Looking forward, the prospects for sustaining solid economic growth in the period ahead are good," Greenspan said.

But with the economy rebounding, some companies are finding it easier to raise prices, Greenspan said. He noted that the fall in the value of the U.S. dollar and a strengthening global economy were adding to pricing pressures at home.

While stressing that inflation remains low, he said it was the job of the Federal Reserve to be vigilant for an unwelcome flare-up in this gauge.

"As I have noted previously, the federal funds rate must rise at some point to prevent pressures on price inflation from eventually emerging," Greenspan said.

Since last June, Greenspan and his policy-making colleagues at the central bank held that rate at 1 percent, the lowest since 1958. This rate is the interest that banks charge each other on overnight loans. It is the Fed's primary tool for influencing economic activity.

So far, broad inflation pressures have yet to build, Greenspan said. But the Fed, he said, "recognizes that sustained prosperity requires the maintenance of price stability and will act, as necessary, to ensure that outcome."

Pressed by some lawmakers to be more specific on when the central bank might begin raising interest rates, Greenspan gave no direct response.

"Greenspan's message is interest rates are on a one-way street up. But it will be months before we reach that point," said Stuart Hoffman, chief economist at PNC Financial Services Group. He and others are forecasting a rate increase in August.

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