Stay up to date with notifications from The Independent

Notifications can be managed in browser preferences.

Greenspan warns next interest rate move likely to be up: Recent increase a form of low-cost insurance against inflation before pressures begin to emerg, Fed chairman testifies

Peter Torday,Economics Correspondent
Wednesday 23 February 1994 00:02 GMT
Comments

Your support helps us to tell the story

From reproductive rights to climate change to Big Tech, The Independent is on the ground when the story is developing. Whether it's investigating the financials of Elon Musk's pro-Trump PAC or producing our latest documentary, 'The A Word', which shines a light on the American women fighting for reproductive rights, we know how important it is to parse out the facts from the messaging.

At such a critical moment in US history, we need reporters on the ground. Your donation allows us to keep sending journalists to speak to both sides of the story.

The Independent is trusted by Americans across the entire political spectrum. And unlike many other quality news outlets, we choose not to lock Americans out of our reporting and analysis with paywalls. We believe quality journalism should be available to everyone, paid for by those who can afford it.

Your support makes all the difference.

ALAN Greenspan, the chairman of the US Federal Reserve Board, said yesterday that short-term US interest rates were likely to rise in the next few months but played down fears that inflation pressures were mounting.

Mr Greenspan told the Banking Committee of the US House of Representatives that the Fed's recent quarter-point increase in the federal funds rate, to 3.25 per cent, was a form of 'low-cost insurance' against future inflation pressures. In semi-annual testimony on monetary policy, he said: 'To promote sustainable growth, history suggests that real short-term rates are more likely to have to rise than fall from here.'

He warned that the Fed was obliged to act before inflation pressures began to emerge and policy was aimed at heading off a resumption of inflation in 1995. With no immediate evidence of an acceleration of inflation, 'we are focusing on 1995 and beyond. We want to make sure our monetary policy addresses that outlook'.

The Fed forecast inflation of about 3 per cent for 1994 against an annual rate of 2.7 per cent in December. Mr Greenspan said the consumer price index overstated inflation, but he warned that a 3 per cent inflation rate could not be considered stable.

The financial markets drew comfort from the Fed's forecast that a slowdown in the expansion was likely, suggesting that an imminent further tightening in monetary policy was not on the cards. The US central bank predicted that growth would ebb to a rate of 3-3.25 per cent in the year to the fourth quarter from the 7 per cent annual rate of growth estimated by many private analysts for the fourth quarter of 1993. Mr Greenspan predicted that this would lead to a renewed drop in long-term interest rates.

Led by the US treasury market, global bond prices rallied modestly and equity markets in Europe and the US adopted a firmer tone.

Mr Greenspan said that while the economy's forward momentum remained intact, the California earthquake and harsh winter weather might have dampened spending in January and February. The latest figures for US consumer confidence, released yesterday, showed a modest fall in optimism. Although the decline occurred from a high level, it reflected a sharp fall-off in positive expectations for economic conditions in the next six months.

But he added: 'We begin to see ever-increasing evidence that the economic recovery is increasingly entrenched' - despite the prospect of a temporary slowdown in housing construction and car sales. Growth of more than 3 per cent should lead to a further decline in unemployment.

He made it clear that the Fed did not regard rapid growth as the cause of inflation, but rather the excess credit that built up in its wake. The recent rise in short-term rates was meant to show that the Fed had 'no inclination' to supply excess credit this time around.

Join our commenting forum

Join thought-provoking conversations, follow other Independent readers and see their replies

Comments

Thank you for registering

Please refresh the page or navigate to another page on the site to be automatically logged inPlease refresh your browser to be logged in