Greenspan hints US interest rates to fall

  • @IndyVoices
To the delight of Wall Street, the Federal Reserve chairman, Alan Greenspan, yesterday pronounced that the long-awaited slowdown in the economy is at hand, and for the first time in more than three years hinted that the next move in US short-term interest rates may be down.

Testifying to the Senate Banking Committee, Mr Greenspan warned that the seven straight increases in interest rates since early 1994 would probably not prevent a slight uptick in inflation, to between 3 and 3.5 per cent on the consumer price index, from last year's overall rate of 2.7 per cent. But, he insisted, the economy "almost surely" will slow this year.

He continued, in his opaque central bankers' language: "There may come a time when we hold our policy stance unchanged, or even ease, despite adverse price data, should we see signs that underlying forces are acting ultimately to reduce inflation pressures."

However tortuous, those words propelled both stock and bond markets higher by midsession, and sent the already weak dollar even lower.The currency fell to Y96.85 at midday, close to its post-war low, and dropped below DM1.47.

The latest evidence on the economy, including a jump in January's unemployment rate, faltering retail sales and a decline in housing starts, is that expansion was falling back from from what Mr Greenspan called the "torrid and unsustainable pace" of late 1994, when growth exceeded 4 per cent. But that may not prevent a slight rise in inflation, given the rate at which US factories are running and last year's higher commodity and raw material prices, yet to feed through to the retail level.

Mr Greenspan's predictions were borne out by the Fed's semi-annual report to Congress, also released yesterday, which forecasts 1995 growth of between 2 and 3 per cent, in line with most analysts' expectations and which dovetails with the central bank's longer-term target growth rate of 2.5 per cent.

Few will have been watching his words more closely than President Bill Clinton, whose tenuous hopes of re-election in 1996 would probably vanish entirely were the economy to stall now. Mr Greenspan was confident the rise in interest rates engineered by the Fed would not lead to recession.

At least the spectre of yet higher interest rates has been largely banished. Yesterday's testimony suggested that the Fed's policy-making open market committee will take no action until the early summer, when clear evidence of a slowdown will have made further rate increases moot.