WASHINGTON - Looking at the past is no guide to predicting how quickly and aggressively the Federal Reserve will raise interest rates, Fed Chairman Alan Greenspan told Maryland's senior senator.
In a letter released yesterday, Greenspan repeated his earlier comment that the current low rates "must be returned to a more neutral setting at some point."
The timing and intensity of the Federal Open Market Committee's coming rate increases are highly uncertain. Financial markets are pricing in a quarter-point increase in the federal funds rate by the end of June and at least a full percentage point increase by the end of the year. The Fed's target rate is now at 1 percent, a 46-year low.
In a May 14 letter to Sen. Paul S. Sarbanes, Greenspan said the Fed had raised interest rates "substantially" three times under his watch, with increases ranging from 1.75 to 3.31 percentage points over periods ranging from 10 to 13 months.
"However, judging the likely pace and duration of that transition solely on the basis of past episodes is not appropriate," Greenspan wrote.
"As the FOMC indicated in its May 4 statement, the current backdrop of low inflation and underutilized resources suggests that the transition to a more neutral policy stance can be undertaken at a pace that is likely to be measured."
Commentators have been debating whether the Fed will repeat its performance of 1994, when the federal funds rate rose from 3 percent to 6 percent over 12 months. Bonds suffered their worst year since World War II, pushing over-leveraged Orange County, Calif., into bankruptcy.
Many analysts have said the word "measured" implies that the Federal Open Market Committee intends a slower pace of rate increases than in the past. Others say a booming economy and rising price pressures will leave the market committee with no choice but to raise rates aggressively.
Greenspan's letter was released by Sarbanes, the ranking Democrat on the Senate banking committee.
Greenspan's letter was in answer to a question put to him by the Maryland Democrat at a hearing April 21. Sarbanes asked Greenspan: "Once the Fed starts moving the rates up, how long does that period usually last?"
Greenspan said Sarbanes' question proceeded from a false premise: that once the Fed begins to raise rates, it continues raising rates for a period.