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Greenspan Hints Strongly of Rise in Interest Rates : Economy: Fed chairman's testimony boosts economists' belief that central bank will push up rates at meeting next week.

August 11, 1994|From Times Wire Services

WASHINGTON — Less than a week before a crucial Federal Reserve Board meeting, Chairman Alan Greenspan talked tough Wednesday about inflation. He said nothing to dispel economists' belief that the central bank is preparing to raise interest rates.

"Reading between the lines, he is giving a strong hint he is on the verge of more tightening," said David Jones of Aubrey G. Lanston & Co. of New York.

Many analysts think the Fed will raise interest rates for the fifth time this year when the policy-making Federal Open Market Committee meets Tuesday.

Although Greenspan's testimony before the House Government Operations subcommittee on monetary affairs focused on long-term issues, he also laid out a rationale for increasing interest rates even before any worsening in inflation is seen.

"By the time we see that final goods prices are beginning to accelerate, that's the result of policies put in place a year ago," he said.

"We have no alternative but to be forward-looking. The policies we are making today are really more relevant for 1995 than they are for 1994," he said.

"By the time that aggregate price indexes reveal the inflation is on the upswing, many imbalances that are costly to rectify have developed already," Greenspan said.

In a closely followed survey released Wednesday, 50 top private economists forecast inflation this year at 2.7%, the same as last year.

The private analysts surveyed by Blue Chip Economic Indicators of Sedona, Ariz., predicted prices will rise 3.2% next year.

The Fed has sought to prevent inflation from accelerating by slowing economic growth with increases in short-term interest rates totaling 1.25 percentage points between February and May.

Some Democrats in Congress have criticized the moves as premature, but financial market traders and economists in recent weeks have widely come to expect several more increases this year.

Labor Department inflation reports due out this week will probably give Fed policy-makers the last bit of evidence they need to justify raising short-term interest rates by a quarter of a percentage point at their meeting.

Economists expect the reports to show 0.4% increases in both wholesale and consumer prices in July, which translate into about 5% at an annual rate, said economist Robert Dederick of Northern Trust Co. in Chicago.

"That will give them the support they need for the preemptive actions they are seeking," Dederick said.

Greenspan acknowledged to subcommittee members that dampening inflation may restrain employment growth in the short run, but he said the central bank's primary objective nevertheless is price stability.

In the long run, the increased economic efficiency fostered by low inflation will foster greater job growth, he said.

"Our view is that as we move toward price stability," this sets "in motion forces which enhance all other aspects of the economy," he said.

On another topic, Greenspan said that "the list of shortcomings in U.S. economic data is depressingly long."

However, because the Fed does not rely on any one statistic and supplements its data with anecdotal evidence, the imprecision "does not pose a crippling hardship."

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