Greenspan Warns of Rapid Rise in Rates if Fed Sees the Need

  1. O. K. I am no economic genious. I'm happy when my small business check book balances out at the end of the month. (And I'm proud to say that it does.) But it doesn't take an economic genious to figure out that as the price of oil continues to increase like it's doing, so will the price of ALL the manufactured goods that utilize this "precious" resource. And as the price of these oil-based manufactured goods increase (and there are many), the real threat of inflation becomes more of a reality. And as inflation rises, so will the interest rates.

    UGH!

    For the life of me, I'm still wondering why we've allowed our country and our economy to be so freakin' dependent on oil. But 30+ years after the first sharp rise in oil prices, we still are. You'd think we'd learn from our mistakes.

    Maybe we will learn this time around?!?!?

    I'm pessimistic.

    This article has little to do about our dependence on oil for our economic, energy and manufacturing needs. But it does express concern regarding the impact of the rise in oil prices and its impact on our economy.
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    http://www.nytimes.com/2004/06/09/business/09fed.html

    Greenspan Warns of Rapid Rise in Rates if Fed Sees the Need
    By LOUIS UCHITELLE

    Published: June 9, 2004



    Alan Greenspan, chairman of the Federal Reserve, signaled the financial markets yesterday to prepare for a sharper rise in interest rates in the months ahead if inflation turns out to be a more serious problem than the Fed's policy makers now expect.

    Mr. Greenspan warned investors not to count on the "measured'' increases in short-term rates that the Fed described as its preferred strategy in a communiqué issued after its most recent monetary policy meeting, in early May.

    That view was based on a judgment, which the Fed chairman said he still held, that inflation was not likely to become a significant problem.

    "Should that judgment prove misplaced, however,'' Mr. Greenspan said in a speech delivered by satellite videoconference to a gathering of bankers in London, then he and his central bank colleagues are "prepared to do what is required to fulfill our obligations to achieve the maintenance of price stability.''

    The bond market reacted initially to Mr. Greenspan's remarks by selling Treasury securities. In doing so, traders briefly pushed the rate on long-term Treasury bonds to 4.81 percent from 4.76 percent. By the end of the day, however, the yield on the 10-year Treasury bond had settled back to its earlier level, helping to give the stock market a modest lift.

    "The speech invited speculation that the Fed could raise rates more aggressively,'' said Robert DiClemente, chief domestic economist for Citigroup Global Markets. "But Mr. Greenspan also said that the intention at the moment is to move in a measured way.''

    In his remarks, Mr. Greenspan seemed to be sending the markets a message of reassurance that the Fed has not relaxed its customary anti-inflationary vigilance. In recent months, many people on Wall Street have expressed varying levels of concern that the Fed was being too complacent about the threat of inflation and was at risk of falling behind the curve in keeping inflation under control. Mr. Greenspan offered an assessment of the economy similar to the one that Donald Kohn, a Fed governor, presented in a speech last Friday. But he added some nuances. Both men argued that inflation pressures were still relatively mild; Mr. Greenspan warned - a bit more explicitly than Mr. Kohn - that this assessment could turn out to be wrong.

    "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.''

    That "worrisome element,'' - along with other concerns Mr. Greenspan cited about rising wages outstripping productivity gains and a "recent acceleration of core consumer prices'' - puts the bond market on alert, said Albert Wojnilower, a senior economic adviser for Craig Drill Capital.

    The markets have been conditioned to expect gradual, quarter-point rate increases spaced out over many months, starting with an initial move when the Fed's policy makers meet for a two-day session on June 29 and 30. "Now that conditioning is being withdrawn,'' Mr. Wojnilower said.

    But analysts are still expecting no more than a quarter-point increase at the end of June in the federal funds rate, which regulates the cost of short-term loans between banks and other financial institutions. Those loans, in turn, influence interest rates for car loans, mortgages and other consumer and commercial borrowing. The Fed has kept the funds rate at a 46-year low of 1 percent for nearly a year, managing to help pull the nation out of a weak recovery from the last recession.

    The recovery began to gather steam last summer and the deflationary pressures that once worried Mr. Greenspan are "now presumably safely behind us,'' he said yesterday.

    For the first time in several years, companies are able to make price increases stick, Mr. Greenspan noted. That pricing power is evident in fatter profits as well as in the modest takeoff in consumer prices over the past year.

    As a result of rising compensation, Mr. Greenspan said, unit labor costs are also beginning to rise. But instead of raising prices to accommodate these costs, he said, companies will absorb them and profits will shrink.

    "Fears of losing market share should dissuade businesses from passing these high costs fully through to prices,'' he argued. That reluctance to lose market share "should cap the rise in profit margins and ultimately return them to more normal levels.''

    The biggest uncertainty in this analysis is energy prices. "Higher oil prices, if they persist, are likely to boost core consumer prices, as well as the total price level, in this country,'' Mr. Greenspan warned.

    Still, the Fed chairman held to the view that prices would remain reasonably stable in the weeks and months ahead. Answering questions from the bankers, he said, according to Reuters and other news services, that "so far, we have no reason to believe we will not be able to maintain a measured pace in the elimination of what we presume to be at this stage an unnecessary degree of accommodation.''
    Last edit by Ted on Jun 9, '04
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