- The Washington Times - Tuesday, June 15, 2004

Federal Reserve Chairman Alan Greenspan yesterday said inflation is not a “serious concern,” soothing worries on Wall Street that he will engineer a steep rise in interest rates this month.

At a hearing of the Senate Banking, Housing and Urban Affairs Committee on his nomination for a fifth four-year term as head of the central bank, Mr. Greenspan said inflation is not about to break out primarily because wage increases have been tame and productivity remains robust, allowing the Fed to move at a “measured” pace.

Just before he spoke, the Labor Department reported the biggest consumer price rise in three years, driven by higher energy prices. Consumer prices jumped 0.6 percent last month, but when surging energy and food costs were stripped out, they rose a more modest 0.2 percent.

The jolting inflation report came amid signs that oil and gasoline prices have peaked, however, as supplies of oil rise worldwide. The average price of gasoline at the pump this week slipped back under $2 a gallon, while U.S. light crude fell to $37.19 a barrel yesterday — 12 percent under the record high over $42 set earlier this month.

The dip in energy prices spurred a rise in consumer sentiment early this month in an index published by the University of Michigan, while the easing of inflation and interest-rate worries sparked relief rallies on Wall Street yesterday.

Major stock indexes gained from 0.6 percent to 1.3 percent while the yield on 10-year Treasury bonds, anticipating less-aggressive rate increases by the Fed, declined by the most in three years.

Mr. Greenspan said the central bank does not believe this year’s flare-up in energy and other commodity prices will lead to lasting inflation. Though he suggested that a further spike in energy prices might harm the world economy.

“Inflationary pressures are not likely to be a serious concern in the period ahead,” he said. “Going forward, we must remain prepared to deal with a wide range of events,” including the possibility of further energy spikes brought on by disruptions of supplies in the Middle East.

Also, “notable in this regard is the fortunately low, but still deeply disturbing, possibility of another significant terrorist attack in the United States,” Mr. Greenspan said in testimony that extolled the resilience of the American economy in overcoming the September 11 attacks and other “staggering” shocks in recent years.

Mr. Greenspan repeated the Fed’s intent to start moving up rates gradually at its June 30 meeting so that they are no longer over-stimulating the economy. But he added that if inflation is worse than expected, the central bank may move more aggressively.

Forecasts can be wrong, he said. “If our judgment as to how the economy is going to evolve and how inflation is going to evolve turns out to be mistaken, we will change.”

The key in the Fed’s thinking is labor expenses, which constitute two-thirds of business costs and historically have been the driver of inflation, he said.

Stunning growth of productivity in recent years has held down wage costs — and thus prices — for most businesses, he said.

With the pick-up in job growth this year has come a welcome revival of wage and income growth, but it is not yet enough to spark inflation as long as productivity remains strong, he said.

“The issues that would concern us most is the slowdown in the extraordinary rate of productivity,” he said.

With rate increases on the way, Mr. Greenspan said the “unexpected boom in home sales over recent years” is probably over, and the double-digit rate of home-price appreciation in many areas is likely to slow.

Committee Chairman Sen. Richard C. Shelby, Alabama Republican, told Mr. Greenspan he would move his confirmation ahead quickly.

The 78-year-old Fed chairman has told friends that he intends to retire when his separate 14-year term as a Fed board member runs out in January 2006. That would give the next president the opportunity to name a new chairman early in his term.

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