Alan Greenspan jolted financial markets yesterday with his clearest hint yet that US interest rates may rise soon from the historic 45-year lows they have stood at since last June.
By the close Wall Street was 123 points lower, while bond prices fell sharply, propelling the yield of the two-year Treasury note to an 18-month high. The Fed chairman's remarks also helped underpin a strengthening dollar.
Elliptical as ever, Mr Greenspan avoided direct comment on future Fed monetary policy in his prepared testimony to the Senate Banking Committee.
But the banking system was in good shape to handle any rise in rates, he noted, adding: "The industry appears to have been sufficiently mindful of interest rate cycles and not to have exposed itself to undue risk." His words, which follow a call from the International Monetary Fund that the US should start preparing for higher rates, seemed a first shot in a campaign to do precisely that.
Although market operators do not expect a change when the policy making Federal Open Markets Committee next meets on 4 May, the odds are shortening that the FOMC will nudge up its target for the key federal funds rate some time in the summer, by at least 25 points from the current 1 per cent.
Mr Greenspan told the Senate panel that the economy seemed to have definitely turned the corner. Deflation - a downward spiral of prices and demand - was "no longer an issue." On the other hand, inflationary pressures were also "reasonably contained" and promised to remain so thanks to a continuing "impressive" improvement in productivity.
In recent weeks, several key indicators have taken a sharp turn for the better. After months of stagnation, 308,000 new jobs were created in March, while the economy is on course to expand by 3.5 per cent or more this year.
Consumer spending is again rising, while home and car sales have hit record levels.
Asked if he was optimistic about the economy, the Fed chairman replied simply: "Yes."Reuse content