Greenspan Won’t Rule Out Rate Hike

WASHINGTON — Federal Reserve Chairman Alan Greenspan said Thursday the U.S. central bank will raise interest rates at the first sign of higher inflation but signaled there was little reason to fear an imminent increase.

In testimony to U.S. lawmakers, Greenspan pledged the Fed would watch the economy closely for any signs of overheating, noting that inflation continued to be remarkably restrained. Still, he did not rule out that last month’s rate rise could be followed by more hikes later this year.

During his almost three-hour appearance before the banking committee of the House, the Fed chief also issued a typically cryptic warning over U.S. stock prices, which he said might be rising to “unsupportable” levels.

“If new data suggest it is likely that the pace of cost and price increases will be picking up, the Federal Reserve will have to act promptly and forcefully,” Greenspan said in his twice-yearly monetary policy report to Congress.

Nervous world financial markets read his comments as a sign that the Fed expects interest rates to go up at least once more this year, prompting a sharp drop in the prices of inflation-sensitive U.S. Treasury bonds.

The Fed lifted its key short-term rate last month to 5% from 4.75% to show it is serious about heading off inflation pressures. But it also adopted a so-called neutral stance on the future direction of rates.

Greenspan said that did not preclude the Fed from acting if it saw emerging imbalances. The neutral posture was to make clear that the Fed is not “committed in short order to tighten further,” he said.