Fed chairman Greenspan won't rule out aggressive summer action

WASHINGTON -- Federal Reserve chairman Alan Green-span says policy-makers probably can boost interest rates gradually to head off inflation, but he's not ruling out more aggressive action -- a strong signal the Fed is poised to raise rates this month for the first time in four years.

For nearly a year, a key short-term interest rate used by the Fed to influence economic activity has been at 1 percent, a 46-year low. With the economy now on firm footing, the support provided by such ultralow rates "will become increasingly unnecessary over time," Greenspan told an international monetary conference Tuesday.

Greenspan said the Federal Open Market Committee -- the group that sets interest rate policy in the United States -- is still of the view that any upcoming rate increases would probably be at a "measured" pace. That assessment, he said, was made on the policy-makers' best judgment of how economic and financial forces will evolve in the months ahead.

"Should that judgment prove misplaced, however, the FOMC is prepared to do what is required to fulfill our obligations to achieve the maintenance of price stability so as to ensure maximum sustainable economic growth," said Greenspan, who spoke via satellite to the conference in London.

Greenspan expressed concern over high energy prices and noted that inflation is now stirring after a long hibernation. But he also said productivity gains should help prevent inflation from getting out of hand.

"I think he's trying to say the Fed isn't behind the curve in fighting inflation," said Stuart Hoffman, chief economist at PNC Financial Services Group. "It looks like rates will go up at the end of this month."

Most economists believe Greenspan and his colleagues will raise rates by one-quarter percentage point on June 30. A few, however, are forecasting a half-point increase. Greenspan didn't say what the Fed would do at the June meeting.

On Wall Street, investors appeared to welcome Green-span's assessment of economic conditions. The Dow Jones industrials gained 41.44 points to close at 10,432.52.

During a question-and-answer period, Greenspan suggested that Fed policy-makers are hopeful that the United States will have a smooth economic recovery, which would bode well for a gradual rise in interest rates.

"But just remember forecasting is forecasting," Greenspan cautioned.

Now that the economy and companies' profits have recovered, some businesses are finding it easier to raise prices, something that they were hard-pressed to do during the economic slump. There's been a swing from "heavy business price discounting to the restoration of a significant degree of pricing power," Greenspan said.

In the first four months of this year, consumer prices rose at an annual rate of 4.4 percent, compared with a 1.9 percent increase for all of last year. Core prices -- excluding volatile food and energy -- also picked up steam. So far this year, they went up at a rate of 3 percent, outpacing the 1.1 percent rise for 2003.

Meanwhile, labor costs, driven mostly by skyrocketing benefits costs, also are on the rise.

"Greenspan is certainly not ready to push the inflation panic button," said Steve Stanley, chief economist at RBS Greenwich Capital. "But his attitude seems to be more open-minded and thus he will probably be willing to shift the rate hikes to a higher gear if that becomes necessary."

Fears of losing customers should dissuade businesses from fully passing along to consumers the higher labor, energy and other costs, said Greenspan.

"To date, the aforementioned costs pressures have been relatively subdued," he said. "Nonetheless, the persistence of the rise in energy prices is a worrisome element in the cost picture."

"The recent modest declines in oil and natural gas prices may or may not signal a trend but are nonetheless welcome," Greenspan said.

Analysts don't believe inflation currently threatens the recovery, but the upward pressure in that area marks a big change in the pricing climate from a year ago. The Fed then was worried about the prospects of deflation, which is a prolonged and widespread price decline.