Archive for Wednesday, March 3, 2004

Fed chair readies markets for rise in interest rates

Economists uncertain when increase will occur

March 3, 2004

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— Federal Reserve Chairman Alan Greenspan said Tuesday that extra-low, short-term interest rates eventually would have to go up. He gave no clue when.

Since last June, the Fed's main lever to influence economic activity, called the federal funds rate, has been at 1 percent, a 45-year low. Near rock-bottom, short-term interest rates have helped motivate consumers and businesses to spend and invest, an important factor to lift economic growth.

"The federal funds rate is accommodative ... but at some point, it will have to rise to a more neutral state," Greenspan said as he fielded questions at an economic gathering in New York. He didn't discuss the timing of any such move to raise rates.

Some economists believe the Fed will start to push up rates this year. Others don't believe higher rates will come until 2005. Most economists expect the Federal Open Market Committee to hold rates steady when it meets on March 16.

With inflation low and currently not a risk to the economy, Greenspan and his colleagues, who are responsible for setting interest rate policy in the United States, have said the Fed can be patient in considering rate increases.

Economists didn't view Greenspan's remarks on Tuesday as signaling a change in policy, but they viewed the comments as a reminder to Wall Street and Main Street that super-low, short-term rates can't go on indefinitely.

"The chairman is preparing the markets for an eventual rise in the federal funds rate," said Lynn Reaser, chief economist at Banc of America Capital Management.

"At this point it remains not a question of whether, but just when, it will be appropriate to raise the federal funds rate target."

Reaser thinks the Fed might raise rates as early as its meeting June 29-30.

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