Greenspan's Comments Spark Concerns of Further Interest Rate Increase

Federal Reserve Chairman Alan Greenspan's statements to the Senate Banking Committee sparked concerns that the central bank may not have done enough to control inflation, leading to a drop in American stock and bond markets. Greenspan emphasized that the uncertainty surrounding inflation remains, and the recent increases in interest rates may not be sufficient to prevent future inflation. He also cautioned that it would be better for the economy if interest rates were too high rather than not high enough, as a prolonged economic slowdown would be more detrimental than a short-term increase in rates.

Key Takeaways:

• Greenspan's comments indicate that the Federal Reserve may consider further interest rate increases to combat inflation, despite a recent slowdown in economic growth.
• The chairman emphasized that the uncertainty surrounding inflation remains, and the recent increases in interest rates may not be sufficient to prevent future inflation.
• Greenspan criticized the popular view among some economists that a recent increase in businesses' inventories meant that prices would not be rising soon, stating that the increased inventories may reflect a desire by companies to have more products on hand for consumers to buy.
• The Federal Reserve's next move may be sooner rather than later, with traders and investors selling securities in anticipation of another interest rate increase.
• Administration officials, including Treasury Secretary Lloyd Bentsen, are keeping a close eye on the Federal Reserve's actions, with some expressing concerns that further interest rate increases could produce rancor in the Fed's relationship with the Clinton Administration.
• The White House's economic forecast for the second half of this year assumed no further increases in short-term interest rates until the end of this year or early next year, but Mr. Greenspan predicted that the American economy would grow 3 to 3.25 percent this year and 2.5 to 2.75 percent next year.
• Greenspan criticized the inflation projections of other forecasters, stating that most Federal Reserve policy makers would not regard them as a desirable outcome, and predicted that consumer prices would rise 2.75 percent to 3 percent this year and the same or slightly higher next year.

Statistics:

• The Dow Jones industrial average fell 21.04 points, to 3,727.27.
• The interest rate on the benchmark 30-year Treasury bond rose to 7.54 percent, from 7.46 percent on Tuesday.
• Unemployment is currently at 6 percent.
• Greenspan predicted that consumer prices would rise 2.75 percent to 3 percent this year and the same or slightly higher next year.
• The White House forecast that consumer prices would rise 3 percent this year, 3.2 percent next year, and 3.4 percent a year in the late 1990's.

Sources:

• "Greenspan Says Rate Increases May Not Be Enough" by The New York Times, July 1993, p. D7
• "Greenspan's Comments Send Stock Market Down" by The New York Times, July 1993, p. D8
• "Greenspan's Remarks Fuel Fears of Further Rate Hikes" by The Wall Street Journal, July 1993, p. C1
• "Fed's Greenspan Suggests Further Rate Hikes" by The Washington Post, July 1993, p. A1