WASHINGTON - Federal Reserve officials may have erased their May policy directive leaning toward higher short-term rates.
Board Chairman Alan Greenspan seemed to hint as much in written comments he submitted to the Senate Banking Committee that the panel released yesterday. The comments were in response to questions from committee members in connection with Greenspan's testimony of July 22.
Greenspan said the May 18 decision by the Federal Open Market Committee to tilt toward a tighter monetary policy was taken in part because members concluded inflationary expectations "were unfavorable" in the early months of the year. Further, he said, the committee thought real short-term rates were "unsustainably low and might have to be raised sooner rather than later if inflationary pressures did not subside."
Both reasons for the May action now no longer exist, suggesting that FOMC members voted in their Aug. 17 meeting to go back to a purely neutral policy directive.
Government inflation figures in the last few months have turned benign amid ongoing evidence of a struggling economy. Through July, consumer prices have risen only 2.8%, slightly down from 2.9% over the same period last year. Analysts expect another batch of reassuring numbers with the upcoming August price reports.
Analysts also pointed out that with inflation subsiding, real rates have actually increased slightly even though nominal rates have remain unchanged.
In his comments to the Banking Committee, Greenspan repeated that the Fed expects real short-term rates to rise eventually. Low rates "for long periods of time [are] likely to be incompatible with stable economic conditions," he said.
But Greenspan went on to say that "real rates can rise either because nominal rates increase or inflation expectations decrease."
