Greenspan Won't Reject Aggressive Rate Hikes

Fed Will Control Inflation, He Says

Federal Reserve Chairman Alan Greenspan said yesterday that the central bank will raise interest rates as aggressively as necessary to keep inflation under control.

Greenspan said Fed officials continue to believe they can raise rates at a "measured" pace because of their economic forecasts. But he acknowledged that they might be wrong and have to shift their strategy, which would mean raising rates more quickly or in larger steps than previously envisioned.

"Should our judgment prove misplaced . . . [the Fed] is prepared to do what is required to fulfill our obligations to achieve the maintenance of price stability," the chairman said, according to the text of a speech he delivered via satellite to a conference in London.

Although inflation remains very low by most measures, it has jumped in recent months by a degree that has surprised many at the Fed. Bond prices fell following Greenspan's speech, as many investors concluded that either inflation or interest rates may rise faster this year than they have expected.

Greenspan and other Fed policymakers have signaled repeatedly that they will start raising their benchmark short-term rate from its very low 1 percent level when they meet later this month and will continue to raise it for some time after that. Analysts and investors generally anticipate a quarter-percentage-point increase at that meeting but have been divided over the likely pace and size of increases to follow.

Fed officials said after their last meeting in early May that they believed they probably could raise rates at a "measured" pace. Many analysts have interpreted a "measured" pace to mean quarter-point increases spread over many months or even a few years, gradually raising the benchmark rate, called the Fed funds rate -- the rate charged between banks for overnight loans -- to a level that neither stimulates nor puts the brakes on economic growth.

After Greenspan's speech, " 'measured' is not guaranteed," said Ian C. Shepherdson, chief U.S. economist for High Frequency Economics Ltd., in a note to clients. The chairman is "clearly not yet ready to make the case for [half-point] moves, but this could be the first step."

Greenspan's remarks were the latest of many by Fed officials that have appeared aimed at guiding financial market expectations about the central bank's intentions, to help investors adjust gradually to the higher interest rates that will come with a stronger economy. Fed policymakers also want to tamp down any potentially self-fulfilling expectations that inflation might take off because the central bank is too complacent.

"The commitment of the Federal Reserve to maintaining price stability remains strong and unaltered," Donald L. Kohn, a Fed governor, declared in a speech Friday.

The path of raising rates to do so, he said, "will depend critically on the behavior of inflation."