Central banker says measured increases could be accelerated if needed to fight inflation.
June 8, 2004: 10:49 AM EDT
NEW YORK (CNN/Money) - The Federal Reserve is ready to raise interest rates faster than the slow, measured gains it has been projecting if inflation or market conditions require, Fed Chairman Alan Greenspan said Tuesday.
In a speech to a conference in London, 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's 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 edged lower and bond prices fell as traders worried whether Greenspan's latest remarks were a hint of faster rate hikes coming.
The 10-year Treasury fell about a quarter of a point in price, or $2.50 on a $1,000 bond, sending its yield up to 4.80 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.
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."
In response to a question, Greenspan said both globalization and productivity improvements at home should provide a significant restraint on inflationary pressures going forward.
He said if there were more protectionist trade policies, the reduced global competition could lead to higher inflation, but he said he did not believe that would happen.
"Just remember forecasting is forecasting. I think we do reasonably well," he said. Still he cautioned, "we have to be prepared should we see events occur that are different from how we expect U.S. and world economies to function."
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