WASHINGTON -- Federal Reserve Board Chairman Alan Greenspan strongly hinted Wednesday that the central bank would raise interest rates if inflationary pressures do not ease soon.
Although Mr. Greenspan, who was testifying before the Senate Banking Committee, never uttered the words "interest rate increase," that's what analysts heard.
Nicholas S. Perna, chief economist for Shawmut National Corp., Hartford, said Mr. Greenspan was as clear as any Federal Reserve chairman has ever been in telling Congress that future rate increases are imminent.
"This is about as clear as it gets," Mr. Perna said. "He left the door open to further interest rate increases."
Sung Won Sohn, a senior vice president at Norwest Bank Corp., Minneapolis, agreed. "We can read between the lines that that means further tightening."
Worries Over Dollar's Fall
In his testimony, Mr. Greenspan said he is particularly worried by the fall in the dollar's value because it indicates that foreign investors expect U.S. inflation to pick up.
Further adding to inflation fears are increased demand for labor, higher rates for bonds, and larger than expected growth in gross domestic product, Mr. Greenspan said.
He warned that inflation would imperil the country's economic future and reverse the gains from the 1980s' hard-won fight against inflation.
"We are determined to prevent such an outcome," he said, "and currently are monitoring economic and financial data carefully to assess whether additional adjustments are appropriate."
Two Comments of Note Norwest's Mr. Sohn said he took particular note of two comments made by Mr. Greenspan.
First, his refusal to rule out rate increases within the coming months. Second, his comments about what the fall in the dollar's value means for future inflation.
"This would imply that there is a greater likelihood of the Fed raising rates than we thought in the past," Mr. Sohn said.
But Shawmut's Mr. Perna said Mr. Greenspan also said that several factors contradict the view that inflation sits around the corner.
In particular, Mr. Greenspan said that inventories are growing and wages are not increasing significantly. "He was sort of Harry Truman's worst nightmare," Mr. Perna said, referring to the former president's well-known dislike of economists who could not definitively say what was happening.
If Mr. Greenspan does raise interest rates, he will anger many Democratic lawmakers.
Committee Chairman Donald W. Riegle Jr., D-Mich., said the Fed does not need to raise rates because inflation is not a problem.
Drop in Federal Spending Urged
Mr. Greenspan also urged Congress and President Clinton to reduce federal spending, saying a lower deficit would contribute to economic growth. He said that increased interest rates have not slowed credit demand, which at 5.25%, sits within the central bank's 4% to 8% range.
Mr. Greenspan, who appeared rather reserved throughout the hearing, did laugh at one point during Maryland Democratic Sen. Paul Sarbanes' opening statement. Mr. Sarbanes held up enlargements of several editorial cartoons, one of which pictured a frazzled Mr. Greenspan in the midst of a busy construction site. The caption read, "Mr. Greenspan's worst nightmare," an apparent jab at the central banker's fear that lower unemployment will cause inflation.
Mr. Greenspan appeared before the committee as part of his semiannual responsibility to report to Congress on the state of monetary policy. He testifies Friday before the House Banking Committee.
