June 8, 2004
By KENNETH N. GILPIN

The Federal Reserve Board chairman, Alan Greenspan, said today that the central bank stood ready to tighten monetary policy more rapidly than the financial markets now expect, should inflationary pressures intensify.

Referring to the Fed's policy-making Open Market Committee, Mr. Greenspan said, "The committee is of the view, as you know, that monetary policy accommodation can be removed at a pace that is likely to be measured."

"That conclusion is based on our current judgment of how economic and financial forces will evolve in the months and quarters ahead," he said in remarks delivered by satellite to an overseas conference on money policy. "Should that judgment prove misplaced, however, the F.O.M.C. 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."

Some analysts said that given the difficult task of forecasting future movements in prices, Mr. Greenspan was merely speaking as a responsible policy maker willing to alter course if conditions warranted. But others noted that his remarks seemed somewhat at variance with sentiments recently expressed by other Fed officials.

In the last few days, Fed officials around the country have asserted that neither the new rise in employment nor the recent jumps in consumer prices mean that the economy is in danger of overheating.

In a speech on Friday, for example, Donald L. Kohn, a Fed governor with close ties to Mr. Greenspan, contended that most of the recent rise in prices stemmed from one-time factors.

Even though Mr. Greenspan's comments about what might happen in the future were hypothetical, analysts said the warning he issued today stood in contrast to what some of his colleagues had been saying.

"Other members of the Fed sound so sanguine about inflation that it is responsible for Mr. Greenspan to suggest that in his view the risks around inflation may be more significant than the views of his colleagues," said Alan Sinai, chief executive of Decision Economics, an economic consulting firm.

Ethan Harris, chief United States economist at Lehman Brothers, said that Mr. Greenspan "is hinting he is seeing something a little more permanent" in inflation trends than some of his colleagues at the Federal Reserve.

Bond traders reacted to Mr. Greenspan's comments with modest selling of fixed-income securities, pushing up interest rates by around 5 basis points, or hundredths of a percentage point. Stocks were largely unchanged at midday on Wall Street.

In his remarks, which were delivered by satellite to the International Monetary Conference in London, Mr. Greenspan made it plain that inflation, while higher than it was a year ago, was still running at an acceptable level and would probably remain in check.

But Mr. Greenspan, who is to face a Senate confirmation hearing on June 15 for a fifth term as chairman of the Federal Reserve, sounded a cautionary note about the future.

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

Fed policy makers are to hold a two-day meeting in Washington at the end of the month to consider changes in their monetary policy stance. In addition, they will prepare economic forecasts that Mr. Greenspan will present to Congress in July.

For weeks, market participants and analysts have been expecting that the Fed will raise the overnight federal funds rate, the rate the Fed most closely controls, by one-quarter of a percentage point at the June meeting. Mr. Greenspan's comments today merely reinforced that sense, analysts said.

In addition to his cementing that opinion, analysts said, Mr. Greenspan may have been sending a signal to his Fed colleagues that his view of future inflation is somewhat different than theirs, starting a debate within the Fed over what sort of inflation forecast it will come up with.

"How many times has the Fed been right on its initial take on inflation?" Mr. Sinai said. "The answer is, rarely. But should we fault them for that? No."

Mr. Harris, the Lehman Brothers economist, said that the consumer price index, excluding food and energy prices, was running at a 1.8 percent annual rate, within the 1.5 percent to 2 percent range the Fed would like to see.

While contained, that rate of increase is nevertheless a good bit higher than it was in December 2003, when the so-called "core" consumer price index was rising at a 1.1 percent annual rate.

"If you are going to be a credible inflation fighter, you have to move to Plan B if inflation does not stay within the range the Fed wants to see," Mr. Harris said.

He and other economists have said that they expect the move that the Fed will take later this month will be the first in a series of modest tightenings.

In the futures markets, traders have priced in an increase of 2 percentage points in the fed funds rate over the next 12 months.

However, if over the next few months inflation data show that the upward pressure on prices has intensified, Mr. Harris said the Fed would probably get more aggressive and institute a series of half-point increases in the funds rate.

Imposing that sort of a policy would say, Mr. Harris said, "We want to hurt the economy a little bit."

http://www.nytimes.com/2004/06/08/business/08CND-FED.html?hp