Greenspan: Not Ruling Out Aggressive Moves From Fed

Federal Reserve (search) Chairman Alan Greenspan (search) suggested Tuesday that Fed policy-makers can boost now super-low interest rates gradually, but he didn't rule out more aggressive action to keep inflation at bay.

Although Greenspan repeated the Federal Open Market Committee's (search) view that any upcoming rate increases would likely be at a very methodical pace, he said that assessment was made on Fed 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," Greenspan said in prepared remarks to an international monetary conference in London. He spoke via satellite.

The FOMC is the group that sets interest rate policy in the United States.

With the economy now on a firm growth path, economists widely expect Federal Reserve policy-makers on June 30 to raise a key short-term interest rate for the first time in four years. That rate is now at a 46-year low of 1 percent, where it has been since last June.

In his prepared remarks, Greenspan did not say what the Fed would do with interest rates at the June meeting. Most economists are expecting a quarter percentage point increase.

During a question-and-answer period, Greenspan suggested that Fed policy-makers are hopeful that the United States will have a smooth economic recovery, which would bode well for a gradual rise in interest rates controlled by the Fed.

"At the moment, as best we can judge, things look surprisingly balanced. Indeed, it is rare that we get to this sort of outlook. It's not going to continue that way. It never does," Greenspan said. "But so far we have no reason to believe that we will not be able to maintain a measured pace," in raising rates.

Now that the economy is growing solidly, some companies are finding it easier to raise prices, something that they were hard-pressed to do during the economic slump.

In the first four months of this year, consumer prices rose at an annual rate of 4.4 percent, compared with a 1.9 percent increase for all of last year. Core prices — excluding volatile food and energy — also picked up steam. So far this year, they went up at a rate of 3 percent, outpacing the 1.1 percent rise for 2003.

Meanwhile, labor costs, driven mostly by skyrocketing benefits costs, also are on the rise.

Fears of losing customers should dissuade businesses from fully passing along to consumers the higher labor, energy and other costs, Greenspan said.

"To date, the aforementioned costs pressures have been relatively subdued," he said. "Nonetheless, the persistence of the rise in energy prices is a worrisome element in the cost picture."

On Monday, crude oil prices (search) settled at $38.66, up 17 cents a barrel on the New York Mercantile Exchange. In recent weeks, oil prices climbed past $42 a barrel.

"The recent modest declines in oil and natural gas prices may or may not signal a trend but are nonetheless welcome," Greenspan said.

Private analysts say they don't believe inflation currently threatens the recovery; but the upward pressure in that area marks a big change in the pricing climate from a year ago. The Fed then was worried about the prospects of deflation, which is a prolonged and widespread price decline.

Greenspan said concerns about deflation have vanished.

Productivity gains, meanwhile, should help prevent inflation from getting out of hand in the months ahead, Greenspan said.

On the labor market front, Greenspan welcomed the recent increases in the nation's payrolls.

"The exceptional reluctance to expand payrolls also appears to have waned this year and businesses are once again hiring with some vigor," he said. Still, the Fed chairman said companies' use of temporary workers suggests that continuing wariness on the part of businesses about the sturdiness of the recovery.