Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: THURSDAY, July 21, 1994 TAG: 9407210098
SECTION: NATIONAL/INTERNATIONAL PAGE: A-1 EDITION: METRO
SOURCE: Associated Press
DATELINE: WASHINGTON LENGTH: Medium
Greenspan's tough talk rattled Wall Street, sending both stock and bond prices lower as investors worried that further rate increases could be imminent.
The Dow Jones industrial average dropped 21.04 points to close at 3,727.27 while Treasury's benchmark 30-year bond fell in price, pushing its yield up to 7.55 percent late in the day. The dollar also weakened against both the Japanese yen and the German mark as Greenspan's testimony reignited inflation concerns.
In delivering his biannual report to Congress on monetary policy, Greenspan warned that the Fed was beginning to see increasing threats of future inflation, which he said could not be allowed to get out of hand.
``An increase in inflation would come at considerable cost,'' he told the Senate Banking Committee. ``Harsher policy actions would eventually be necessary to reverse the upsurge in inflationary instabilities. We are determined to prevent such an outcome.''
Greenspan left no doubt that the Fed, which has already boosted interest rates four times since February, was prepared to do more if conditions warrant.
The Fed's target for the federal funds rate, the interest banks charge each other, has been pushed from 3 percent to 4.25 percent, and the credit tightening has sent business and consumer loans, including mortgage rates, up by even greater amounts.
However, private economists said they still believed that the central bank would wait until its Aug.16 meeting and perhaps longer before raising rates again. Many forecasters predicted the Fed will boost rates in quarter-point increments perhaps twice more this year.
``Greenspan is telling us that the economy is looking firm, its strength has spilled over into some early signs of inflation and the Fed is prepared to tighten to prevent any incipient inflation,'' said Allen Sinai, chief economist at Lehman Brothers in New York.
Greenspan's strong hints of future rate increases did not sit well with Democratic members of the Senate Banking Committee. They contended that price pressures remain well-behaved and the Fed's unnecessary credit tightening runs the risk of pushing the country into recession.
``As the Fed pushes interest rates higher, it is pushing down further the hopes of working men and women,'' Sen. Jim Sasser, D-Tenn., told Greenspan.
While Democrats attacked Greenspan for worrying too much about Wall Street and not enough about Main Street, Republicans praised his actions and said he was right to be concerned about the weak dollar and other signs of financial market skittishness.
While Greenspan did not flatly state that the Fed would raise rates further, he listed potential inflation threats, including rapid growth in the economy and jobs, and the recent weakness in the dollar.
``It is an open question whether our actions to date have been sufficient to head off inflationary pressures,'' Greenspan said.
by CNB