Will U. S. rates rise?
Fed chairman Alan Greenspan says the U.S. economy was robust enough to withstand a 50% rise in gas prices. Some analysts think this means interest rates will continue to head upward to keep a lid on inflation
WASHINGTON
• U. S. Federal Reserve chairman Alan Greenspan says the huge U.S. economy has weathered “ reasonably well” the shock of sharply higher interest rates, leading markets to believe interest rates will continue to rise.
Just two weeks before U.S. central bank governors meet again, Mr. Greenspan said the world’s largest economy has enough flexibility in it to withstand major blows such as a 50% increase in oil prices over the past year
“ The impressive performance of the U.S. economy over the past couple of decades, despite shocks that in the past would have surely produced marked economic contraction, offers the clearest evidence of the benefits of increased market flexibility,” Mr. Greenspan told the National Italian American Foundation yesterday.
The comments from Mr. Greenspan, who has just three meetings of the Federal Open Market Committee left to chair before he retires in January, comes as the U.S. Energy Department predicts higher natural gas and home heating fuel prices this winter.
“ The flexibility of our market-driven economy has allowed us, thus far, to weather reasonably well the steep rise in spot and futures prices for oil and natural gas that we have experienced over the past two years,” the 78-year-old Fed chairman said.
Economists believe the Fed will hike its key overnight lending rate at least two more times this year and perhaps even into next year.
“The latest information coming from the Fed points to more rate hikes ahead with the Fed funds rate likely to hit 4.25% this year and 4.50% early in 2006,” said John Johnston, chief strategist with RBC Dominion Securities Inc. in Toronto.
The Fed remains concerned that inflation — driven by higher energy prices — will move more firmly into the U.S. economy unless interest rates are returned to what the central bank considers a more neutral rate. Just 15 months ago, the Fed rate was at a 40- year low of 1%.
“Inflation in an underlying sense is not high now, but there is a risk that it could go higher, and that’s what we are particularly focused on right now,” said Donald Kohn, a Fed governor.
In its September minutes, the central bank governors said the “upside risks to inflation appeared to have increased’’ after Hurricane Katrina hit the U.S. Gulf Coast on Aug. 29 and that “further rate increases probably would be required.”
At that meeting, the Fed voted 9-1 last to raise its main lending rate to 3.75%, the highest in four years. FOMC members next meet Nov. 1.
“One of the things we learned in the 1970s is that expectations are really, really important,” Mr. Kohn said. “Energy prices might affect underlying inflation by affecting expectations about future inflation.”
Mr. Greenspan will chair his final Fed policy meeting on Jan. 31, when his nonrenewable term as a governor expires. He has been head of the Fed for 18 years.
George W. Bush, the President, has not named his nominee to replace Mr. Greenspan or moved to fill two vacancies for Fed governors. However, that that is widely expected before the end of the year.