Inflation Doesn't Worry Greenspan

Fed Chairman Says Threat Is in Check -- for Now -- and Interest Rates Can Be Raised Gradually

Federal Reserve Chairman Alan Greenspan yesterday played down inflation concerns after a government report showed consumer prices rose in May at the fastest monthly rate in more than three years.

The consumer price index, the most widely followed inflation measure, rose by a seasonally adjusted 0.6 percent in May, primarily because of climbing energy and food prices, the Labor Department reported.

But after stripping out volatile food and energy costs, the so-called core CPI rose just 0.2 percent last month, and by a low 1.7 percent in the 12 months that ended in May.

Greenspan, speaking during a Senate Banking, Housing and Urban Affairs Committee hearing on his nomination for a fifth term as chairman, indicated that the central bank continues to believe it can raise interest rates gradually in coming months because inflation is likely to remain tame. The first increase is widely expected to come at the next Fed meeting June 29-30.

But Greenspan also made clear that Fed officials are prepared to raise rates more quickly if their forecasts turn out to be wrong.

"Our general view is that inflationary pressures are not likely to be a serious concern in the period ahead," he said in response to a question from committee Chairman Sen. Richard C. Shelby (R-Ala.).

Greenspan recalled that Fed policymakers said in a statement after their last meeting in early May that they believed that they likely would raise their target for a key short-term interest rate at a "measured" pace.

Analysts have interpreted "measured" to mean the Fed expects to raise the target in quarter- or half-point steps over many months or several years. Greenspan said yesterday that the pace of increases still "is very likely to be measured over the quarters ahead."

"But, clearly this is our general view of the outlook, and forecasts are subject to error," he added. "And if our judgment as to how the economy is going to evolve and how inflation is going to evolve turns out to be mistaken, we will change" in order to keep inflation under control.

Greenspan's comments further reinforced analysts' expectations that the Fed will raise its benchmark federal funds rate, the rate charged between banks on overnight loans, to 1.25 percent from 1 percent at the next policymaking meeting in two weeks. That would be the first increase in the target in four years, and the first change in a year.