Alan Greenspan all but spelled out Thursday that the Federal Reserve will soon raise interest rates, and by dispelling doubts he helped push up the prices of bank stocks and bonds.
In testimony to the Joint Economic Committee of Congress, the central bank chairman also suggested that a single rate hike-and not a series of credit-tightening moves-is all that is likely.
With the future in clearer view, the Standard & Poor's bank index advanced 1.8%, while the yield on the Treasury's benchmark 30-year bond slipped back below the 6% level, to 5.96%. The blue-chip Dow Jones industrial average moved up 56.68 points, or 0.53%, to 10,841.63.
In the most telling section of his congressional testimony, Mr. Greenspan said:
"For monetary policy to foster maximum sustainable economic growth, it is useful to preempt forces of imbalance. ... When we can be preemptive, we should be, because modest preemptive actions can obviate the need of more drastic actions at a later date."
In short, Fed officials have concluded that key forces in the economy, notably a tight labor market, need some reining in, despite the lack of any visible inflation threat right now.
"This is about as directly as you'll ever get it from the Fed," said Nicholas S. Perna, chief economist at Fleet Financial Group, Boston. "He drew a pretty straight line," said Joel L. Naroff, chief economist at Commerce Bancorp, Cherry Hill, N.J.
Some saw Mr. Greenspan's words as signaling that a single quarter-point increase in the federal funds rate-now 4.75%-at the Fed's policy meeting on June 29 and 30 is probably all that is ahead.
"We read his testimony as suggesting that one move will be sufficient," said Merrill Lynch & Co. chief economist Bruce Steinberg. "Indeed, even without any tightening, the economy is already slowing."
Mr. Steinberg forecasts economic growth at a 3% to 3.5% rate during the rest of the year and noted that Mr. Greenspan himself has said the U.S. economy is capable of 3% annual growth without risk of inflation.
"The point is that the economy doesn't need to slow much to come into line with what the Fed finds acceptable." Moreover, he noted the Fed chairman said Thursday that "for the period immediately ahead, inflationary pressures still seem well contained."
But Mr. Perna and others said it is more likely that the Fed may, between June and October, take back two or all three of the quarter-point rate cuts it put through last fall as global markets stumbled.
Beyond the next meeting, the Fed's monetary policymakers are set to gather on Aug. 24 and Oct. 5. Most observers think the Fed is unlikely to move in the final few months, when to do so might complicate year-2000 issues.
Mr. Greenspan was signaling that "rates need to rise enough to slow growth to 3%, and 50 to 75 basis points should do it," said Ian Shepherdson of High Frequency Economics, Valhalla, N.Y.
The Fed chairman, responding to questions after his prepared remarks, said the Fed does not have a series of moves in mind.
"We very rarely-in fact, I don't recall ever-have a sense that we are going to do a series of increases or decreases," Mr. Greenspan said.
"Because monetary policy can be changed within minutes' notice, we don't have to have a whole series of planned changes one way or the other," he said. "We always have the capability of moving fairly quickly."