Fed Chairman Alan Greenspan's Humphrey-Hawkins testimony momentarily calmed investors' rate fears, but a closer review of last week's remarks prompted some economists to predict a rate hike soon.
After Mr. Greenspan's testimony, the benchmark 30-year bond rose almost half a point, pushing down its yield more than three basis points, to 6.97%.
Economists, however, were quick to play down the significance of the bond market's one-day reaction. Some said they anticipate an increase in the federal funds rate at the next Federal Open Market Committee meeting, scheduled for Aug. 20.
Mr. Greenspan's description of inflation was "somewhat hawkish in the sense that he described it as having been low for temporary reasons which could end at any time," said Roseann Cahn, chief economist at CS First Boston.
"In the last two months, the market has been bouncing around a lot day to day, while bonds have been stuck in the 6.9% to 7.2% range," said Mickey Levy, chief economist at NationsBanc Capital Markets, a subsidiary of NationsBank Corp.
"When you stand back from day to day, bonds have been in a holding pattern," he said.
Ms. Cahn said that a tightening on Aug. 20 of 25 basis points - a quarter of one percentage point - has a greater than 50% probability. That could be followed by a 50-basis-point tightening after the election, which would raise the federal funds rate to 6%, from its current level of 5.25%, Mr. Levy said.
"The odds are growing that the Fed will have to raise rates by 25 to 50 basis points," said Nicholas S. Perna, chief economist at Fleet Financial Group.
Mr. Perna said that a number of important indicators are due out this week. "Virtually all the truly important inflationary indicators that the Federal Reserve will have in hand" at its next policymaking meeting will be out this week, he said.
The key indicator is the employment cost index, which shows the increase in the cost of hiring an hour of labor, Mr. Perna said.
If the index, which is due out Friday, rises 0.8% or 0.9%, the Fed will be forced to raise rates, he said.
"That number stiffens the resolve on the part of the Federal Reserve," Mr. Perna said. "The stronger the number, the more likely the Fed is to take aggressive action."
NationsBanc's Mr. Levy said the two most important indicators that will affect the Fed are the July employment report and the retail sales report, which is due out the week of Aug. 11.
Mr. Levy said retail sales exhibited a modest decline in June but "one month does not a trend make. If there is a second month of weakness, that might tell you something else."
Mr. Greenspan's recent comments left open the door to a Fed tightening, should the economy require it, which puts "a lot of focus on the upcoming numbers," Mr. Levy said.
