[an error occurred while processing this directive]
BBC News
watch One-Minute World News
Last Updated: Thursday, 1 July, 2004, 06:25 GMT 07:25 UK
Greenspan gambles on low inflation
Stephen Evans
By Stephen Evans
BBC North America business correspondent

Alan Greenspan
Greenspan believes recent rising prices are a blip
If Alan Greenspan had put up a six-foot neon sign on top of the bright, white Federal Reserve building in Washington he couldn't have signalled more clearly that interest rates were about to go up.

In every recent testimony before Congress and in every speech to bankers, he has indicated that the time was right for a "measured" tightening of monetary policy.

So the announcement surprised no-one.

Nor was there any shock in the language in the accompanying statement - which is the way it's meant to be. Governors of central banks aren't supposed to go round surprising financial markets.

In the statement, the Federal Reserve said that interest rates would rise "at a pace that is likely to be measured".

If Mr Greenspan manages to snuff out incipient inflation without halting growth, his place of honour will be secure

Though, it added the rider that it would "respond to changes in economic prospects as needed to fulfil its obligation to maintain price stability".

In other words, it doesn't think inflation is about to resurface but if it does, the rises will be by a half point not a quarter point - and they'll happen more frequently.

Balancing act

At the heart of the Fed's decision is the belief that recent rises in prices have been one-off and may well be reversed (as is happening with oil) and not part of a general process of price rises.

As the statement put it: "A portion of the increase in recent months appears to have been due to transitory factors."

That may or may not turn out to be true. There is some evidence, though, that inflationary pressures remain relatively low.

Growth is steady and companies are making profits - but they're not yet confident enough to take on large numbers of workers. Productivity is rising quickly.

The question now is whether rising rates will cool down the hotter parts of the economy without choking off general growth.

Higher interest rates ought to slow consumer spending but all the signs are that optimism is returning and that may take some denting. And the housing market is so feverish that price rises will take some stopping.

Miracle or mirage?

If Mr Greenspan manages to snuff out incipient inflation without halting growth, his place of honour will be secure.

Under his chairmanship, the Federal Reserve would have successfully cut rates to their lowest since 1958, bringing strong growth both in the late 1990s after the stock market crash and then again after September 11, 2001.

He would then have managed to put rates back up again to keep the growth going without inflation.

But if employment starts taking off, and inflation turns out to be more ingrained than the Fed seems to think - and if it has to raise interest rates at a faster pace - then critics will ask if the great prosperity under Mr Greenspan had quite as much to do with his magic touch as his many fans think.

The BBC is not responsible for the content of external internet sites


News Front Page | Africa | Americas | Asia-Pacific | Europe | Middle East | South Asia
UK | Business | Entertainment | Science/Nature | Technology | Health
Have Your Say | In Pictures | Week at a Glance | Country Profiles | In Depth | Programmes
Americas Africa Europe Middle East South Asia Asia Pacific