WASHINGTON -- Federal Reserve policy-makers won't hesitate to raise interest rates again if the economy doesn't slow and inflation shows signs of accelerating, Fed Chairman Alan Greenspan suggested yesterday.
The Fed is prepared "to act promptly and forcefully" to increase borrowing costs to sustain an expansion that's on track to become the longest in U.S. history, Greenspan said in his twice-yearly testimony to Congress.
"Should productivity fail to continue to accelerate and demand growth persist or strengthen, the economy could overheat," Greenspan told the House Banking Committee. That's why pre-emptive Fed action may be needed "if new data suggest it is likely that the pace of cost and price increases will be picking up," he said.
The central bank chairman didn't signal that the Fed would raise the overnight bank loan rate at its next meeting, on Aug. 24. Greenspan warned that the quarter-point increase on June 30 might not be the last one needed to cool growth and said a possible "euphoric" rise in stocks is fueling increased consumer spending.
"He's pretty much saying that you can expect another hike," said Adam Blankman, an economist at Standard & Poor's MMS in Belmont, Calif. "Whether it will be in August, it's not clear, but it's starting to look more likely, based on this testimony."
"When we can be pre-emptive, we should be," Greenspan said, repeating his testimony to the Joint Economic Committee of Congress June 17, two weeks before the last interest-rate increase.
That works both ways, he noted. The Fed cut the overnight bank rate by three-quarters of a percentage point in three moves from September to December last year, when financial markets threatened to freeze up after Russia's default Aug. 17.
"This evenhandedness is necessary because emerging adverse trends may fall on either side of our long-run objective of price stability," he said.
The Fed's policy-making Open Market Committee announced June 30 that it had "no predilection" about whether higher rates would be needed. In his testimony yesterday, Greenspan said not all committee members agreed with that statement.
The committee "did not believe that its recent modest tightening would put the risks of inflation going forward completely into balance," Greenspan said.
Still, Greenspan said, the committee "did not want to foster the impression that it was committed in short order to tighten further." Rather, he said, "it judged that it would need to evaluate the incoming data for more signs" that inflation could be developing.
U.S. share prices fell almost 1 percent yesterday before recouping some losses. The Dow Jones industrial average closed 33.56 points, or 0.31 percent, lower at 10,969.22.
There are signs that the gross domestic product -- a measure of the overall economy -- is expanding too fast, Greenspan said. The increase in jobs has exceeded the growth of the working-age population by almost half a percentage point during the past year, which "implies that real GDP is growing faster than its potential," he said.
Even though consumer prices were unchanged in May and June, Greenspan said, a further decline in the unemployment rate from a recent range of 4.2 percent to 4.3 percent would be "one indication that inflation risks were rising."
The Fed's official forecast is for the economy to expand no more than 3.75 percent this year, measured from last year's fourth quarter. That would be down from last year's 4.3 percent expansion using the same yardstick and would be close to the 3.8 percent growth in 1997.