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Financial markets

Greenspan Suggests Further Interest Rate Hikes to Counter Inflation

Strategic Insights

— 1 min read

Federal Reserve Chairman Alan Greenspan testified on Capitol Hill, stating that the US economy is growing at too fast a pace, risking inflation. This potentially signals a further increase in interest rates, sending financial markets into a slide. The Dow Jones industrial average plummeted over 20 points to 3,727, while long-term rates surged to 7.55 per cent. Greenspan hinted at a rate hike to 7.8 per cent at the next meeting, citing inflationary pressures, a battered dollar, and growing labour shortages.

Key Takeaways:

  • The US economy is growing at an annual rate of 3.4 per cent in the first three months of this year, with potential growth in the same range or higher in the second quarter.
  • Greenspan suggests that interest rates may need to rise by another 0.25 or 0.50 percentage points, with analysts expecting a 0.25 percentage point hike.
  • The prime rate, a benchmark for many consumer loans, has already risen to 7.25 per cent, and analysts predict further increases.
  • Housing starts declined 9.8 per cent in June, partly due to the rise in mortgage rates.
  • Sherry Zeigler, an economist, suggests that the Fed might raise interest rates to 8.5 per cent by the end of the year.
  • Alan Greenspan emphasizes the need for continued vigilance due to signs of an 'incipient inflationary process,' including labour shortages and price increases for raw materials.

Statistics:

  • The economy grew at a 3.4 per cent annual rate in the first three months of this year.
  • The interest rate on overnight loans between banks is 4.25 per cent, its highest level in two and a half years.
  • Housing starts plunged 9.8 per cent in June.
  • Pre-tax corporate profits rose by 12.5 per cent in the same period.
  • Unemployment is expected to remain between 6 and 6.25 per cent for the rest of this year and through next year.
  • The dollar fell to 98.63 yen and DM1.5588 after Greenspan's statement.

Sources:

  • Sherry Zeigler, economist (no date, exact quote not provided)
  • Alan Greenspan, testimony on Capitol Hill (exact date not provided)
  • Journal article (no date, exact name or publication not provided)

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