Newspaper article The Florida Times Union

Inflation Dangers Lingering Fed Ready to Raise Interest Rates Again

Newspaper article The Florida Times Union

Inflation Dangers Lingering Fed Ready to Raise Interest Rates Again

Article excerpt

WASHINGTON -- The American economy is enjoying an "exceptional year," Federal Reserve Chairman Alan Greenspan said yesterday. But he warned that inflation dangers could be lurking and he expressed new worries about the high-flying stock market.

Delivering the Fed's midyear report to Congress on the state of the economy, Greenspan defended the central bank's recent interest rate increase -- the first in two years -- and pledged to move "promptly and forcefully" to raise rates again should inflation pressures intensify.

Wall Street, which had been hitting new highs in recent weeks on the belief the Fed would be slow to boost rates further, fell on Greenspan's remarks, with bond prices and stock prices both lower.

Private economists said Greenspan's comments were a lot tougher than they had been expecting and greatly increased the likelihood of further Fed rate increases later this year.

"I viewed Mr. Greenspan's testimony as a stern lecture to the stock market," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis. "He gave the market a cold shower to try to cool it down."

The Fed on June 30 nudged up to 5 percent its target for the federal funds rate, the interest that banks charge each other, triggering an immediate quarterpoint increase in banks' prime lending rate, the benchmark for millions of consumer and small business loans.

Wall Street rallied after that rate hike because the Fed immediately announced it was moving its policy directive -- an indication of future moves -- from one leaning toward tightening back to neutral.

Analysts said Greenspan's comments yesterday were a strong indication the policy directive will now be switched back at the August meeting to one leaning toward higher rates. And many analysts said they were looking for the Fed to follow with one or two more rate hikes, beginning in October. …

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