Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: TUESDAY, February 1, 1994 TAG: 9402010031
SECTION: BUSINESS PAGE: B-8 EDITION: METRO
SOURCE: Associated Press
DATELINE: WASHINGTON LENGTH: Medium
"Short-term interest rates are currently abnormally low," he told Congress' Joint Economic Committee. "At some point, absent an unexpected and prolonged weakening of economic activity, we will need to move them."
He carefully avoided saying exactly when, but private economists widely expect the rate banks charge each other for overnight loans to rise anytime between next month and the end of spring.
It would be the first increase in this federal-funds rate in five years, when the rate peaked at 9.75 percent, and the first change of any kind since September 1992, when the rate fell to a nearly 30-year low of 3 percent.
A rise in the rate engineered by the Fed eventually could translate into increases in consumer rates on auto loans, adjustable-rate mortgages and bank deposits.
Long-term rates, such as those on corporate bonds and 30-year mortgages, are set in financial markets and would not necessarily be affected by a Fed move, at least not at first.
"There's no evidence that inflation is coming back," President Clinton said, but he sounded almost resigned to a modest increase in short-term rates.
"What I hope is that it won't raise long-term rates, because there is no need to do it," he said. "And I hope that the stock market won't take an adverse view, because we've still got good, strong growth in this economy."
The Democratic chairman and vice chairman of the joint committee - Rep. David Obey of Wisconsin and Sen. Paul Sarbanes of Maryland - urged Greenspan to postpone any rate increase as long as possible
"I think the economic ship is on course," Sarbanes said. "I think `steady as she goes' is the lesson all of us should draw from the current situation."
Greenspan acknowledged that many of the forces that restrained inflation to 2.7 percent in 1993, the second-best showing in 29 years, will work to hold down prices this year.
Still, he noted "upward pressure on prices of a number of industrial materials" and warned it would be a mistake to delay raising rates until after inflation clearly had gotten worse.
"By the time inflation pressures are evident, many imbalances that are costly to rectify have already developed, and only harsh monetary therapy can restore the financial stability necessary to sustain growth," he said. "This situation, regrettably, has arisen too often in the past."
Greenspan depicted an economy with enough vigor to withstand a modest rate increase. He said the 5.9 percent growth rate in the gross domestic product in the fourth quarter was not likely to last. But neither was the economy likely to lapse to a near standstill, as it did a year ago, he said.
"The economic fundamentals appear to be in place for further solid gains in the level of activity in the quarters ahead," he said.
Economists who reviewed Greenspan's testimony said he is laying the political groundwork for a rate increase by offering an explanation in advance.
"He was building a foundation to justify at least some modest tightening steps. The timing is really tricky, but I'd say it will be within the next month or two," said economist David Jones of Aubrey G. Lanston & Co. in New York.
The Fed's key policy-making panel, the Federal Open Market Committee, is scheduled to meet Thursday and Friday to map its monetary strategy for the next six months.
by CNB