Greenspan remains open to higher rate


WASHINGTON -- Further interest rate increases remain "an open question" because inflation's warning signs are "mixed," Federal Reserve Chairman Alan Greenspan told the Senate Banking Committee yesterday.

But he gave no hint that another move by the Fed is imminent.

In one of his semiannual reviews of the economy, Mr. Greenspan also told senators the dollar's recent 5 percent slide against the yen, and its dips against other major currencies, are "bad for the economy" and warned against letting the greenback become so weak as to provoke "a flight from the world's prime reserve currency."

Mr. Greenspan's refusal to close the door on additional increases in interest rates, which the Fed has bumped up by 1.25 percent in four moves that riled stock and bond markets from February through May, nudged down stock and bond prices.

The Dow Jones industrial average lost 21.04 points to close at 3,727.27, but stock prices were affected by a raft of corporate earnings reports and downgrading of analysts' recommendations on several key stocks as well as by the Fed chairman's testimony. The yield on the benchmark 30-year bond broke a weeklong rally as interest rates rose to 7.56 percent, compared with Tuesday's close of 7.46 percent.

Maryland Senator Paul S. Sarbanes, generally expected to become the Banking Committee's chairman next year, led a contingent of liberal Democratic members in assaults on Mr. Greenspan's refusal to rule out further interest rate increases.

"The Federal Reserve has engineered a slowdown in the economy despite the absence of any inflation problem," Mr. Sarbanes said. He brandished charts showing inflation indexes at their lowest levels in 30 years, a graph showing car sales taking a sudden dive in recent weeks and a government report, published yesterday morning, that showed new housing starts down by an unforeseen 10 percent in June.

Mr. Greenspan replied that "labor demand has been quite strong, pointing to growth in production and incomes," and "the amount of slack in the economy, while difficult to judge, appears to have become relatively small."

But he emphasized that the Fed's rate-setting Open Market Committee "substantially completed" the shift from "accomodative" to "neutral" rates with its half-point move of May 17 and "does not find that there is any materially different view of what we are seeing" now compared with May 27, when he last appeared before the committee.

"In May, I thought we were looking at another rate increase in July or August, but now I'd say the chance of August is slightly less than 50-50, though I still think rates will go up at least once more in the second half of this year," Alfred G. Smith III, chief economist for NationsBank, said after watching Mr. Greenspan's testimony on television.

Deflating financial markets was one of the purposes of this year's round of interest rate increases, Mr. Greenspan told the senators, because investors had developed an attitude that, "there was no downside."

"That clearly has changed," though there is no way to know whether all the slack is out of the markets yet, Mr. Greenspan said.

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