US central bank chairman Alan Greenspan yesterday spoke of his confidence in policy-makers who will raise interest rates if necessary to dampen inflation pressures that could threaten economic growth.
His comment, to the Senate Banking Committee, fits with analysts' widespread expectation that monetary policy-makers will nudge short-term interest rates up for the first time in a year-and-a-half by their next meeting on August 20.
But Mr Greenspan left his options open, saying ``inflation has remained quiescent'' and predicting a slowdown in economic growth that could dampen inflation pressures.
The Fed chair-man's testimony, accompanying the central bank's twice annual report to Congress on economic and monetary policy, comes as evidence of surging growth at the end of the April-June quarter has spooked inflation-wary financial market traders and sent stock prices gyrating almost daily.
The central bank - the Federal Reserve - is predicting growth, as measured by the fourth-quarter-to-fourth-quarter increase in gross domestic product, of between 2.5% and 2.75% this year, declining to between 1.75% and 2.25% next year.
It forecast consumer price inflation between 3% and 3.25% this year, falling to between 2.75% and 3% in 1997. That reflects, Mr Greenspan said, ``determination to hold the line on inflation'' by the Fed's policy-making committee.
``I am confident that the Federal Open Market Committee would move to tighten reserve market conditions, should the weight of incoming evidence suggest an oncoming intensification of inflation pressures that would jeopardise the durability of the economic expansion,'' he said.
The veteran Fed chief, now 70, confirmed by the senate last month in his third four-year term, ran through a list of forces restraining inflation, including global competition and job insecurity that has led workers to accept smaller wage increases.
``These forces exert a transitory, not permanent, effect,'' he said, and ``there are early indications that this episode of favorable inflation developments, especially with regard to labour markets, may be drawing to a close.
``Clearly, in this environment, the Federal Reserve has had to become especially vigilant to incipient inflation pressures that could ultimately threaten the health of the expansion,'' he said.
During the debate on his confirmation, Mr Greenspan was criticised by a number of Midwest Democrats for being overly worried about inflation and holding interest rates too high, dampening growth and wage gains. Farmers want low-interest loans to help finance their businesses.
Between February 1994 and February 1995, the Fed doubled a key benchmark rate, charged among banks on overnight loans, from 3% to 6%. Between last July and January, it cut the rate to 5.25% but has left it unchanged since as it evaluated the economy.
Mr Greenspan defended his caution, telling senators: ``Wage gains that are eaten up by inflation help no-one and ultimately place economic growth in jeopardy.''
Why are you making commenting on The Herald only available to subscribers?
It should have been a safe space for informed debate, somewhere for readers to discuss issues around the biggest stories of the day, but all too often the below the line comments on most websites have become bogged down by off-topic discussions and abuse.
heraldscotland.com is tackling this problem by allowing only subscribers to comment.
We are doing this to improve the experience for our loyal readers and we believe it will reduce the ability of trolls and troublemakers, who occasionally find their way onto our site, to abuse our journalists and readers. We also hope it will help the comments section fulfil its promise as a part of Scotland's conversation with itself.
We are lucky at The Herald. We are read by an informed, educated readership who can add their knowledge and insights to our stories.
That is invaluable.
We are making the subscriber-only change to support our valued readers, who tell us they don't want the site cluttered up with irrelevant comments, untruths and abuse.
In the past, the journalist’s job was to collect and distribute information to the audience. Technology means that readers can shape a discussion. We look forward to hearing from you on heraldscotland.com
Comments & Moderation
Readers’ comments: You are personally liable for the content of any comments you upload to this website, so please act responsibly. We do not pre-moderate or monitor readers’ comments appearing on our websites, but we do post-moderate in response to complaints we receive or otherwise when a potential problem comes to our attention. You can make a complaint by using the ‘report this post’ link . We may then apply our discretion under the user terms to amend or delete comments.
Post moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours.
Read the rules hereComments are closed on this article