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Greenspan Suddenly Silent About 'Measured' Rate Increases

By Nell Henderson
Washington Post Staff Writer
Friday, February 18, 2005; Page E01

Federal Reserve Chairman Alan Greenspan, in two days of testimony on Capitol Hill, expressed confidence about the health of the U.S. economy while admitting puzzlement about some of its current features.

Greenspan signaled that the Fed will continue raising its benchmark short-term interest rate to keep inflation under control. But he also omitted any guidance about the pace of future increases, reflecting the fact that the path ahead has become murkier because of several unknowns.

Federal Reserve Chairman Alan Greenspan completed two days of congressional testimony yesterday. (Kevin Wolf -- AP)

_____Fed Rate Cuts_____
Graphic: Historical Changes in the Federal Funds Rate
In His Own Words: Greenspan comments and Fed actions since 2001.
Timeline: Interest rate changes since the recession of 1990.
Quiz: How Much Do You Know About the Fed?
Federal Reserve Special Report

His comments were notable for what he did not say, dropping his previous references to a likely "measured" pace of rate increases.

Fed officials started using that word last spring to indicate that they probably would raise the federal funds rate, the overnight rate charged between banks, in small steps over many months to allow financial markets to adjust smoothly.

This month, they raised the rate to 2.5 percent from 2.25 percent, the sixth quarter-percentage-point increase since June, when the rate was an unusually low 1 percent.

The Fed has lifted the rate "significantly" during that time, "but by most measures, it remains fairly low," Greenspan said. That observation, combined with Fed officials' expectation of solid economic growth and concerns about inflation risks, indicated that the rate will continue to rise.

Fed officials said in a written statement after their meeting two weeks ago that the pace of future increases was likely to be "measured." But this week, Greenspan did not use the word except to refer to past increase.

By dropping "measured," the chairman was not suggesting that the Fed is about to embark on a more aggressive series of rate increases. He may have been indicating that Fed policymakers are less willing to comment on what they might do in the future.

Several Fed officials have stressed in recent speeches that as the funds rate goes higher, they will increasingly base their actions on the most current economic data, which could justify a slower or quicker pace of rate increases.

It was easier for the Fed to signal future actions when the path of policy was very clear, as it was last spring, when the economic expansion was becoming more self-sustaining. Top Fed officials agreed that a 1 percent rate was far too low and had to be lifted to avoid fueling inflation. Once they began raising the rate in June, they kept raising it at every meeting thereafter, even when the economy hit what they called a "soft patch" in the summer because of higher energy prices.

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