Laird, what if he doesn't even raise 25 bps??
(Chant after me: Measured Pace, No Need to Raise Fast, Not Like 1994, Productivity Miracle, This Time it's Different)
Greenspan Says Fed Ready to Raise Rates as Warranted (Update4)
June 8 (Bloomberg) -- Federal Reserve Chairman Alan Greenspan said the U.S. central bank is ready to raise interest rates and would accelerate the pace of increases if inflation exceeds the Fed's forecast. The Federal Open Market Committee ``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 told an international monetary panel in London via satellite.
The yield on U.S. Treasury notes due in two years, the most sensitive to expectations for monetary policy, rose to the highest since July 2002 as traders priced in the possibility that the Fed could raise rates at a quicker pace. Investors have pushed government debt yields up since mid-March on concern the Fed will be too slow to stem inflation, eroding the value of fixed-income payments. Consumer prices will likely rise this year by 2.7 percent, the most since 2000, based on the median forecast of 45 economists polled by Bloomberg News.
``The last thing anyone should want is for the Fed to allow itself to fall substantially behind the curve,'' said Stephen Stanley, chief economist at RBS Greenwich Capital Inc. in Greenwich, Connecticut. ``Greenspan is certainly not ready to push the inflation panic button, but his attitude seems to be more open- minded and thus he will probably be willing to shift the rate hikes to a higher gear if that becomes necessary.'' The benchmark 10-year Treasury note fell 5/32 point, pushing its yield up 2 basis points to 4.78 percent at 1:41 p.m. in New York. The two-year fell 1/16 point, pushing its yield up 4 basis points to 2.7 percent. The dollar rose the most against the euro in three weeks, trading at $1.2258 from $1.2321 yesterday.
Not Like 1994
Greenspan sought to reassure investors that the Fed was not setting them up for a repeat of 1994, when the central bank starting tightening monetary policy with quarter-point increases in the overnight banking lending rate, only to follow with bigger increases to stem inflation. The Fed raised its the rate to 5.5 percent at year-end from 3 percent at the start of 1994. ``Unlike 1994, there has been an appreciable increase of market rates in anticipation of policy tightening,'' Greenspan said. He added that ``history cautions that investors' anticipations of the cumulative magnitude of policy actions and their timing under such circumstances is far from perfect.''
The Fed raised interest rates 2.5 percentage points in 1994 as it tried to get ahead of rising inflation expectations. In early February that year, Greenspan, urged FOMC members to raise rates slowly because financial markets were unprepared for larger moves. Several members, such as San Francisco Fed President Robert Parry, urged a more aggressive approach. Parry retires from the Fed this month.
Quarter-Point Increases
Federal funds futures contracts show traders expect the U.S. central bank to raise the overnight lending rate by a quarter percentage point at the conclusion of their two-day meeting on June 30. Fed officials will also then pool their forecasts for employment, inflation and growth in preparation for Greenspan's semi-annual Congressional testimony on monetary policy in July. Some analysts say the Fed may have to increase interest rates in larger steps later if it maintains a gradual approach for now. ``The Fed won't let inflation get out of hand,'' said John Ryding, chief market economist at Bear, Stearns & Co. Inc. ``The problem with falling behind is you have to do more, and ultimately the rate increase will be more the slower the Fed goes at first.''
`Measured'
The U.S. central bankers on May 4 left the overnight rate unchanged at 1 percent, nearly a 46-year low, saying ``policy accommodation can be removed at a pace that is likely to be measured.'' Companies have been reporting increased pricing power in recent months, and Greenspan said that the Fed has be prepared to capture some change in inflation dynamics that it may not see yet. ``The outlook is for stable prices for the period ahead,'' Greenspan said in response to an audience question. ``Forecasting is forecasting. We do the best we can and I think we do reasonably well. But we have to be prepared should we see events occur that seem inconsistent with the general model'' of how the U.S. and world economy work. Policy makers have ``provided ample liquidity to the financial system that will become increasingly unnecessary over time,'' Greenspan said in his speech. Fed officials are ``of the view, as you know, that monetary policy accommodation can be removed at a pace that is likely to be measured.''
Productivity
A major reason the central bank can move at a slower pace is that productivity and business caution are helping keep inflation under control, even as companies begin to raise prices. Productivity is ``a critical factor in our view of the pace of removal of accommodation,'' Greenspan said. And given companies' reluctance to spend at an ``aggressive pace,'' he said, ``we are not likely to see a surge in activity that will cause a problem for us.'' For the economy as a whole, ``things look surprisingly balanced,'' he said. ``Indeed, it is rare that we get this sort of outlook.''
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