Economy on track, Fed chairman says

February 23, 1994|By Joel Obermayer | Joel Obermayer,Sun Staff Writer The New York Times News Service contributed to this article.

WASHINGTON -- Federal Reserve Chairman Alan Greenspan said yesterday that the economy is on track for long-term growth accompanied by subdued inflation, even though interest rates are more likely to rise than fall this year.

Although his remarks were not surprising, they did appear to calm lawmakers who had voiced concern that the Fed might stall the recovery and Wall Street investors wary of resurgent inflation. The yield on a 30-year Treasury bond, a measure of investors' expectations for inflation, closed lower yesterday for the first time in seven trading sessions.

Speaking before a House Banking subcommittee, Mr. Greenspan said steady strength in the economy has allowed the Fed to refocus its energies on keeping a lid on inflation rather than promoting growth. That's about as close as the Fed chairman ever comes to warning investors and consumers alike that rates will probably rise.

"Economic growth this year likely will be 3 percent or slightly higher," he said. "We are focusing increasingly at this stage on the outlook for 1995 and beyond."

Mr. Greenspan's testimony was widely anticipated and came at the end of more than two weeks of Wall Street jitters, set off when the Fed pushed short-term interest rates higher for the first time in five years on Feb. 4.

Since then long-term interest rates have risen as yields on 30-year Treasury bonds increased one-third of a percentage point.

Yesterday, both bonds and stocks rallied after Mr. Greenspan's remarks. The yield on a 30-year Treasury bond closed at 6.60 percent, down from 6.62 percent last week, and the Dow closed up 24.20 points, at 3,911.66.

David L. Donabedian, vice president of Mercantile Bankshares Corp., said the Fed's first interest rate increase was a "warning shot," and it could easily raise short-term rates three or four more times over the next year.

"In the last couple of months, Greenspan has been as blunt as he ever gets," he said. "This looks like the beginning of a gradual move to higher interest rates."

Mr. Greenspan's remarks were part of a report outlining Federal Reserve policy the Fed chairman gives twice a year to a subcommittee of the House Banking Committee.

With the economy struggling to get moving during the last few years, the Fed kept interest rates low.

But these days, there is plenty of evidence that the recovery is "well-entrenched" and stimulants are no longer needed, Mr. Greenspan said. Assuming inflation is kept in check, the economic outlook "is the best we have seen in decades," he said.

Some indicators of inflation, like the Consumer Price Index, a broad gauge of daily living costs, have remained fairly stable. The index was unchanged in January, the first time that has occurred in more than four years.

But several other indicators, such as a survey taken in February by the Federal Reserve Bank of Philadelphia, have shown prices paid by businesses increasing.

Mr. Greenspan used his appearance yesterday to try to ease inflation concerns. He downplayed the Philadelphia Fed report, predicting that inflation would be only slightly higher this year than last year, and he repeated his recent warnings that he would be willing to push up short-term rates if necessary to fight inflation.

But several members of Congress suggested the Fed has been overzealous in its focus on inflation and maintained that any moves toward higher interest rates ran the risk of squelching economic growth.

"I am concerned that the Federal Reserve's action may impede or even end our slow economic recovery," said Rep. Paul E. Kanjorski, D-Pa.

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