WASHINGTON – Federal Reserve (search) ChairmanAlan Greenspan (search) said slack in the economy and low inflation meant the Fed could likely raise interest rates at a gradual pace, according to a letter released Wednesday.
"The current backdrop of low inflation and underutilized resources suggests that the transition to a more neutral policy stance can be undertaken at a pace that is likely to be measured," Greenspan said in a May 14 letter to Sen. Paul Sarbanes (search), which was released by the office of the Maryland Democrat.
Greenspan noted that the Fed's policy-setting panel had also indicated the central bank could likely pursue a "measured" pace of rate hikes in a statement after its last meeting on May 4.
The Fed chief was responding to a question Sarbanes had posed at an April 21 hearing of the congressional Joint Economic Committee (search) about the pace and cumulative magnitude of rate hikes in the past when the central banks had raised overnight interest rates substantially.
"As I noted in my testimony, the current highly accommodative stance of monetary policy must be returned to a more neutral setting at some point in order to foster price stability and maximum sustainable growth," Greenspan said.
In the letter, Greenspan said it would be inappropriate to judge the likely pace of Fed rates hikes on the basis of past episodes as he provided details on three periods in which the Fed had raised rates sharply dating back to 1988.
He noted that the Fed had raised the overnight federal funds rate by 3.31 percentage points from March 1988 to May 1989; 3 percentage points from February 1994 to February 1995; and 1.75 percentage points from late June 1999 to May 2000.
Markets are bracing for what is expected to be the beginning of a rate-hike cycle at the Fed's next meeting on June 29-30. The Fed has held overnight interest rates at a 1958 low of 1 percent since last June.