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Archive for Wednesday, June 9, 2004

Fed chair signals first rate hike in four years

Most analysts expect quarter-point increase

June 9, 2004

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— Federal Reserve Chairman Alan Greenspan says policy-makers probably can boost interest rates gradually to head off inflation, but he's not ruling out more aggressive action -- a strong signal the Fed is poised to raise rates this month for the first time in four years.

For nearly a year, a key short-term interest rate used by the Fed to influence economic activity has been at 1 percent, a 46-year low. With the economy now on firm footing, the support provided by such ultra-low rates "will become increasingly unnecessary over time," Greenspan told an international monetary conference Tuesday.

Greenspan said the Federal Open Market Committee -- the group that sets interest rate policy in the United States -- is still of the view that any upcoming rate increases would probably be at a "measured" pace. That assessment, he said, was made on the policy-makers' best judgment of how economic and financial forces will evolve in the months ahead.

"Should that judgment prove misplaced, however, the FOMC is prepared to do what is required to fulfill our obligations to achieve the maintenance of price stability so as to ensure maximum sustainable economic growth," said Greenspan, who spoke via satellite to the conference in London.

Greenspan expressed concern over high energy prices and noted that inflation was stirring after a long hibernation. But he also said productivity gains should help prevent inflation from getting out of hand.

"I think he's trying to say the Fed isn't behind the curve in fighting inflation," said Stuart Hoffman, chief economist at PNC Financial Services Group. "It looks like rates will go up at the end of this month."

Most economists believe Greenspan and his colleague will raise rates by one-quarter percentage point on June 30.

A few, however, are forecasting a half-point increase. Greenspan didn't say what the Fed would do at the June meeting.

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