Greenspan hints at faster interest rate rises

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The Independent Online

The US Federal Reserve will do "what is required" to keep inflation in check, Alan Greenspan said yesterday in remarks that were taken as a heavy hint of an imminent hike in interest rates.

The US Federal Reserve will do "what is required" to keep inflation in check, Alan Greenspan said yesterday in remarks that were taken as a heavy hint of an imminent hike in interest rates.

In a speech to bankers in London, Mr Greenspan suggested the Fed was prepared to act aggressively if needed to stem inflation. He stuck to the Fed's policy line that it will remove the stimulus to the economy from monetary policy at a "measured pace".

But he added: "That conclusion is based on our current best judgement of how economic and financial forces will evolve in the months and quarters ahead. Should that judgement prove misplaced ... the Fed is prepared to do what is required to fulfil our obligations to achieve the maintenance of price stability."

The dollar rose against the euro and the yen as the heads of the Japanese and European central banks gave little hint they were planning to raise rates. "Alan Greenspan did not need to make any meaningful comment today," said Rob Carnell, the senior international economist at the Commonwealth Bank Australia. "The fact that he chose to make comments specific to the current monetary policy stance suggests that this was a deliberate attempt by the Fed chairman to steer rate expectations upwards."

Mr Greenspan said the financial markets had already begun to price in higher rates in contrast to the painful tightening cycle of 1994, when investors were caught off guard by rate hikes.

But he added to analysts' fears that the Fed might have to tighten policy more quickly than the markets were now expecting. "History cautions that investors' anticipations of the cumulative magnitude of policy actions and their timing under such circumstances are far from perfect," he said to laughter from the audience of global banking chief executives.

Mr Greenspan flagged up oil prices as a clear risk to the outlook for growth and inflation. "Higher oil prices, if they persist, are likely to boost core consumer prices, as well as the total price level, in this country," he said. US crude prices hit an all-time high of $42.45 a barrel last week but the price has dropped about $4 since then. "The recent modest declines ... in prices may or may not signal a trend but are nonetheless welcome," he said. He added that a sharp recovery in US business profits provided evidence of "the restoration of a significant degree of pricing power," which he said was also apparent in accelerating core inflation.

Jean-Claude Trichet, the president of the European Central Bank, told the international monetary conference he was also concerned about the oil price. "Whatever happens, our main responsibility is to prevent second-round effects which would make higher inflation a permanent feature and which would prevent us from delivering price stability," he said.

Toshiro Muto, the deputy governor of the Bank of Japan, said Japan would continue with its zero interest rate policy until inflation began to rise. "For the BOJ it is of the utmost importance to make this recovery into sustainable growth, putting an end to deflation," he said. "With this in mind, we are determined to continue current policy even in the middle of an economic recovery."

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