WASHINGTON -- Despite harsh admonitions from Capitol Hill, Federal Reserve Chairman Alan Greenspan on Friday refused to rule out the possibility that the central bank would raise rates again this year.
While the Fed's recent actions to push interest rates up have "substantially removed" the degree of accommodation embedded in previous monetary policy, he said it was still unclear whether the central bank had gone far enough.
Only after the dust from the rate increases has settled will the Fed be able to evaluate how much more tightening, if any, is needed, the Fed chairman said. "Clearly, uncertainties regarding the economic outlook remain, and the Federal Reserve will need to monitor economic and financial developments to judge the appropriate stance of monetary policy," he added.
Waiting Period Urged
Democratic lawmakers hope that takes a long time. After calling Mr. Greenspan to Congress to berate him for raising rates, they urged him to hold off on pushing rates any higher. "We now need a pause in rate changes - to allow the economy to digest the policy moves you've already made," said Donald Riegle, chairman of the Senate Banking Committee. Sen. Paul Sarbanes, D-Md. evoked chuckles from even the Fed chairman when he showed blowups of several cartoons ridiculing the central bank. One of them showed a caricature of a gloomy Mr. Greenspan, declaring, "The economy is picking up. We're doomed!"
"Every time the economy comes up out of the water to catch its breath, you push it right back down again," he said.
Response to Recovery
Mr. Greenspan rebuffed suggestions that the Fed's moves were spurred by an irrational fear of inflation and would endanger economic growth. Hc characterized the actions as a response to a complete recovery from the credit crunch of the late 1980s, rather than to growing signs of inflation ahead. A surge in hank lending this year has been one of the indications to the Fed that the economy is back on a solid footing. Business loans grew at a 9.5% annual rate in the first four months of this year, the Fed chairman said. Consumer lending, too, has been brisk.
Fed officials wanted to raise rates slowly, Mr. Greenspan said, because they feared that investors had become too complacent about market risks.
Both sophisticated and inexperienced investors had developed "unrealistic expectations" about the high rates of returns and low volatility of their stock and bond investments, he said.
"In retrospect, it is evident that all sorts of investors made this change in strategy - from the very sophisticated to the much less experienced," Mr. Greenspan said.
