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Fed will `resist vigorously’ any rise in inflation levels

SHARE Fed will `resist vigorously’ any rise in inflation levels

Federal Reserve Chairman Alan Greenspan, while proclaiming that the economy's performance so far this year has been impressive, declared today that the central bank stood poised to "resist vigorously" any threatened increase in inflation.

Delivering his midyear report to Congress, Greenspan signaled that central bank policymakers were more concerned about a potential outbreak of inflation than they were about the current dramatic slowdown in economic activity."Given the current tightness in labor markets, the potential for accelerating inflation is probably greater than the risk of protracted, excessive weakness in the economy," he said in his prepared remarks for the Senate Banking Committee.

Those comments dampened the hopes of some economists that the Fed, faced with an economy that slowed sharply in the spring, would move to cut interest rates. Instead, all of Greenspan's remarks seemed to be preparing financial markets for a possible rate increase down the road.

Even with his added warnings about inflation risks, Greenspan gave no indication that an increase in interest rates is imminent.

Instead, he held out the possibility that the Asian financial crisis, which is pushing America's trade deficit to record levels, could do the job of slowing the economy enough that the central bank will be able to leave interest rates unchanged.

The testimony today stood in contrast to Greenspan's last economic report to Congress, in February. At that time, the Fed chairman said the risks appeared equally balanced between higher inflation coming from the tight labor markets and greater economic weakness coming from the fallout of the Asian currency crisis.

Since that testimony, the economy has boomed, with overall output of goods and services rising at an annual rate of 5.4 percent in the first three months of the year. That surge of growth pushed unemployment down to a 28-year-low 4.3 percent in the spring.

"As evidence piled up that the economy continued to run hot during the winter, the Federal Reserve's concerns about inflationary pressures mounted," Greenspan said today.

Because of the strong growth and low unemployment, Greenspan said that Fed policy-makers moved in March to a "state of heightened alert against inflation."

The central bank has not changed interest rates since March 1997, when it boosted the federal funds rate, the interest that banks charge each other, by a quarter-point to 5.5 percent. That increase had been expected to be the first of many as the Fed moved to head off inflation and keep the economic expansion alive.

But for the past 16 months, the Fed has been content to leave rates alone as inflation has been well-behaved. Consumer prices for the first six months of this year, helped by plunging oil prices, have risen at an annual rate of just 1.4 percent, even lower than the 11-year-best of 1.7 percent in 1997.