Greenspan Says Fed May Raise Interest Rates Again

WASHINGTON —  Federal Reserve Board Chairman Alan Greenspan warned Tuesday that the nation’s central bank could raise interest rates again soon to keep a lid on inflation, prompting new concerns in Congress.

In his semiannual report to Congress, Greenspan said that the nation’s recovery is beginning to roll in most parts of the country and that the Federal Reserve stands ready to take tough preemptive action to keep inflationary pressures from building and the economy from overheating. He called raising interest rates a form of “low-cost insurance” against future inflation.

Separately, Administration officials said they expect to announce soon that White House economic adviser Alan Blinder would be named vice chairman of the Federal Reserve, making him what an Administration official called a “leading candidate” to succeed Greenspan when his second term expires in 1996.

Greenspan is a lifelong Republican who was first appointed by President Ronald Reagan in 1987 and then reappointed by President George Bush. As vice chairman, Blinder would succeed David Mullins, who was appointed by Bush in 1990 and resigned effective Feb. 14.

Greenspan told a House Banking, Finance and Urban Affairs subcommittee Tuesday that “if the Federal Reserve is to promote long-term growth, we must contribute, as best we can, to keeping inflation pressures contained.”

Greenspan said that “to promote sustainable growth . . . real short-term rates are more likely to have to rise than fall from here. I cannot, however, tell you at this time when any such rise would occur.”

In the arcane world of monetary policy, such comments amount to a thinly veiled threat that the Federal Reserve is ready to raise rates again at any time to head off rising prices. In fact, most economists expect the Fed to raise rates two or three times, leaving them by the end of 1994 as much as 1 full percentage point higher than they were at the close of 1993.

The reaction in Washington was subdued. Unlike the Bush Administration, the Clinton White House in recent weeks has sought to avoid any public confrontations with the Federal Reserve over economic policy, and officials played down the significance of the central bank’s decision to raise rates earlier this month.

Still, the White House repeatedly has pointed to the decline in interest rates over the last year as the most important effect of the Clinton deficit-reduction plan. Aggressive Federal Reserve action to move rates back up will clearly increase tensions between the Administration and the central bank, which continues to be dominated by Republican appointees.

President Clinton told reporters Tuesday that “there is no reason to believe there is an inflation problem.” He said long-term interest rates, which rise with investors’ expectations of inflation, could be “considerably lower than they are”--about 6.5% for U.S. government bonds that mature in 10 years or more.

Press Secretary Dee Dee Myers said the Administration likes interest rates where they are. “The continuation of low interest rates has (helped) get the economy going again,” Myers told reporters. “We hope that long-term interest rates stay low.”

In Congress, Greenspan met more direct complaints. Rep. Paul E. Kanjorski (D-Pa.), chairman of the banking subcommittee, made it clear that he did not want the central bank to decide unilaterally to slow the economy even before it has a chance to gather momentum.

“Like many Americans, I am concerned that the Federal Reserve’s action may impede or even end our slow economic recovery,” he told Greenspan.

“It seems to me you almost have a phobia when it comes to inflation,” Rep. Toby Roth (R-Wis.) said. “Do you see the Fed focusing maybe too much on inflation and to the detriment of an expanding economy?”

But Greenspan said that “the most virulent element to create economic distress and unemployment is inflationary pressures which have been allowed to get out of hand.”

Greenspan’s warning follows the Federal Reserve’s decision earlier this month to raise its benchmark federal funds rate, which banks pay on overnight loans from other banks, for the first time in five years. That rate hike, to 3.25% from 3%, sparked a 96-point selloff in the stock market.

Tuesday’s comments by Greenspan had the opposite effect. Stocks and bonds finished higher after Greenspan’s reassurance that the Fed is adopting a consistent stance and would take a get-tough approach to inflation. The Dow Jones industrial average gained about 24 points.

The growing concern in Washington about interest rates comes as congressional Democrats are pressing the Fed to open its closed-door deliberations to the public and to submit to greater oversight from the White House and Congress.

Greenspan has been caught for months in a running battle with House Banking Chairman Henry B. Gonzalez (D-Tex.) over whether the Fed should release transcripts of closed-door Fed meetings about monetary policy.

Gonzalez is also pushing legislation that would require the 12 presidents of the Federal Reserve’s regional banks to be nominated by the President, thus increasing White House influence over decision-making at the central bank.

The President now appoints the members of the Fed’s board of governors, but the regional bank presidents, who have a strong voice in interest rate policy, are named by the board of directors of their banks with the approval of the Fed’s board of governors.

Greenspan is also at odds with the Administration over its proposal to consolidate banking regulatory authority into one new agency, stripping the central bank of its regulatory powers. Greenspan has said he believes that would permanently weaken the Fed’s ability to monitor and influence the direction of the nation’s financial system.

Meanwhile, the central bank’s seven-member board of governors has a second vacancy. The Administration wanted to nominate George Perry, an economist at the Brookings Institution, a Washington policy research organization.

But Perry apparently withdrew his name from consideration. He was interested in the board seat only if it might lead to the vice chairmanship, Administration officials said. They added that they planned to seek a woman or minority for the second vacancy to balance the appointment of Blinder, a white male. Perry could not be reached for comment.

Blinder, 48, is a former Princeton University economist who served as an economic adviser to the Clinton presidential campaign in 1992. He could not be reached for comment.