Federal Reserve Chairman Alan Greenspan said on Wednesday US interest rates will have to rise at some point but appeared to rule out an imminent increase by stressing that more vigorous growth had not yet sparked broad price pressures.
In tensely awaited testimony to the congressional Joint Economic Committee, Greenspan repeated that a long period of disinflation had ended and US central bank policy-makers were on heightened alert about the need for higher interest rates. However, he offered no clue about the timing.
"As I have noted previously, the federal funds rate must rise at some point to prevent pressures on price inflation from eventually emerging," he said. "As yet, the protracted period of monetary accommodation has not fostered an environment in which broad-based inflation pressures appear to be building."
Financial markets appeared to key off Greenspan's reassuring words about restrained inflation, as the dollar weakened slightly against other currencies and Treasury bond prices rose in the apparent belief rate rises were not as imminent as some investors had feared after similar remarks on Tuesday.
The Fed chief said growth in productivity, or hourly output per worker, remained strong and there was considerable unused capacity in the economy that will keep price rises in check.
Analysts said that meant the federal funds rate - the rate charged on overnight loans between banks and the Fed's main tool for affecting borrowing costs throughout the economy - was on the way up but policy-makers were not under pressure to push it higher.
The fed funds rate now is at a 1958 low of 1 percent after the Fed implemented a string of 13 cuts to pull the economy out of recession in 2001 and to nurture it past shocks, including the September 11, 2001, attacks in New York and the Washington area.
"He is suggesting eventually the Fed will tighten, but there is no urgency in the tone with which he is making that point," said Tim O'Neill, chief economist for BMO Financial Group in Toronto. "That suggests the Fed is of the view that it can be measured in the timing and pace of its move away from a very accommodative policy."
Greenspan was decidedly upbeat about the economy's prospects, noting that job markets were on the mend "after a protracted period of weaknesses" and the buoyant mood was spilling into corporate spending plans.
"Importantly, the caution among business executives that had previously led them to limit their capital expenditures appears to be giving way to a growing confidence in the durability of the expansion," the Fed chairman said.
Greenspan has consistently maintained that an improvement in business confidence was needed to spark and sustain a healthy economic recovery.
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