Fed chief considers steeper rate hike
By Nell Henderson
The Washington Post
WASHINGTON — Fed Chairman Alan Greenspan said yesterday that the central bank will raise interest rates as aggressively as necessary to keep inflation under control.
Greenspan said Federal Reserve officials continue to believe they can raise rates at a "measured" pace because of their economic forecasts. But he acknowledged that they might be wrong and have to shift strategy, which would mean increasing rates more quickly or in larger steps than previously envisioned.
Greenspan
"Should our judgment prove misplaced ... (the Fed) is prepared to do what is required to fulfill our obligations to achieve the maintenance of price stability," the chairman said in the text of a speech delivered via satellite to a conference in London.
Although inflation remains very low by most measures, it has jumped in recent months by a degree that has surprised many at the Fed.
Bond prices fell after Greenspan's speech, as many investors concluded that either inflation or interest rates may rise faster this year than they'd expected. As for stocks, the Dow Jones industrials gained 41.44.
Greenspan and other Fed policy-makers have signaled that they will start raising their benchmark short-term rate from a 46-year low of 1 percent when they meet later this month, and will continue to raise it for some time after that. Analysts and investors generally anticipate a quarter-percentage point increase at that meeting, but have been divided over what actions would follow.
When Fed officials said in early May that they believed they probably could raise rates at a "measured" pace, many analysts interpreted that to mean quarter-point increases spread over many months or even a few years, raising the benchmark rate gradually to a level that would neither stimulate or nor brake economic growth.
Greenspan's remarks were the latest of many by Fed officials that have appeared aimed at guiding financial market expectations about the central bank's intentions, to help investors adjust gradually to the higher interest rates that will come with a stronger economy. Fed policy-makers also want to tamp down any potentially self-fulfilling expectations that inflation might take off because the central bank is too complacent.
"The commitment of the Federal Reserve to maintaining price stability remains strong and unaltered," Donald Kohn, a Fed governor, said on Friday.
The path of raising rates to do so, he said, "will depend critically on the behavior of inflation."
Both Greenspan and Kohn prominently noted the recent rise in inflation and sounded more concerned about its likely path than in other recent comments.
Consumer prices, excluding those in the volatile food and energy categories, rose 1.4 percent in the 12 months that ended in May, according to a Commerce Department gauge favored by the Fed. That is a low so-called core inflation rate and well within the comfort range of many Fed officials. But it has risen steadily since December, when it was 0.8 percent.
This rise surprised Fed officials who had predicted early this year that inflation would stay very low and possibly even decline further because of slack in the economy — relatively high unemployment and unused production capacity.
Kohn outlined several one-time or temporary factors that help explain the jump in inflation, including higher prices for raw materials, the weakness of the dollar and the rebound of inflation from an abnormally low level a year ago.
Kohn said he still believes "the rise in inflation will be limited," but made plain his heightened wariness by commenting that "experience counsels caution."
