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Greenspan: Faster rate hikes possible
Central banker says measured increases could be accelerated if needed to fight inflation.
June 8, 2004: 3:54 PM EDT

NEW YORK (CNN/Money) - The Federal Reserve is ready to raise interest rates more aggressively than the slow, measured pace it has been projecting if inflation or market conditions require, Fed Chairman Alan Greenspan said Tuesday.

Speaking to bankers in London via satellite, Greenspan repeated his belief that the Fed, the U.S. central bank, can be slow in raising short-term rates in the coming months.

"That conclusion is based on our current best judgment of how economic and financial forces will evolve in the months and quarters ahead," he said.

But he added: "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." The Federal Open Market Committee (FOMC) is the Fed's policy-making arm.

The Fed has held its target for the fed funds rate at 1 percent, the lowest in more than 40 years, even as the economy has strengthened, while it waited for the job market to pick up. It said in its policy statement after it held rates steady in May that future rate hikes would occur "at a pace that is likely to be measured."

But now, with job growth in the last three months at its strongest pace in four years, wages creeping higher and prices for some goods and services rising, economists expect the Fed to raise its fed funds target by a quarter point later this month, rather than waiting for August. The fed funds rate is an overnight bank lending rate that affects other rates throughout the economy.

On Wall Street,stocks were mixed and Treasury bond prices fell as traders worried whether Greenspan's latest remarks were a hint that faster rate hikes were coming.

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Is Federal Reserve Chairman Alan Greenspan ready to start raising interest rates more aggressively? CNNfn's Kathleen Hays examines his comments.

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"Greenspan opened the door to 50-basis-point rate hikes," said Tony Crescenzi, chief bond market strategist at Miller Tabak & Co. There are a 100 basis points in one percentage point.

"While Greenspan did not hint that such would be delivered at the June 29-30 [Fed policy] meeting, he chose language that could well be inserted into the policy statement for that meeting, paving the way for a half-point hike at the August 10 or subsequent meetings."

The 10-year Treasury fell about an eighth of a point in price, or $1.25 on a $1,000 bond, sending its yield up to 4.79 percent from 4.76 percent late Monday. Bond prices and yields move in opposite directions.

The Fed cuts short-term rates to boost economic growth and raises them to try to ward off inflation.

Traders at the Chicago Board of trade are betting there will be a quarter-point hike at the end of the Fed's two-day meeting on June 30, but only an 8 percent chance of a half-point increase at that time. The traders are betting on another quarter point hike at the Aug. 10 meeting, with a 39 percent chance of a half-point increase at that time.

Interest rates
Federal Reserve
Alan Greenspan

Greenspan acknowledged that investors expect higher rates ahead, though he cautioned, "history cautions that investors' anticipations of the cumulative magnitude of policy actions and their timing under such circumstances are far from perfect."

Greenspan also said that while competitive pressures could limit how much businesses raises prices as the economy recovers, high energy prices posed an inflation risk.

"To date, (those) cost pressures have been relatively subdued," he said, Reuters reported. "Nonetheless, the persistence of the rise in energy prices is a worrisome element in the cost picture."

Light crude oil hit $42.45 a barrel in the U.S. last week, the highest in 21 years, but the price has dropped about $4 a barrel since then. Greenspan called the decline welcome, but said it was too soon to call it a trend.

"Higher oil prices, if they persist, are likely to boost core consumer prices, as well as the total price level, in this country," he said.

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While some measures of inflation have picked up in recent months, some Fed officials have said the flare-up, excluding oil, is likely to prove largely temporary.

Greenspan, answering questions before the banking group, made clear he was not abandoning the Fed's relatively benign outlook.

"Our view ... is for stable prices or close to stable prices for the period ahead," he said, according to Reuters.

In response to a question, Greenspan said globalization and productivity improvements at home should help restrain inflation going forward.  Top of page

-- from staff and wire reports

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