The chairman of the US Federal Reserve, Mr Alan Greenspan, yesterday indicated that interest rates might have to rise faster than expected to keep inflationary pressures under control.
Speaking from Washington via satellite link to a conference in London, Mr Greenspan said he remained confident the Fed could afford to remove monetary stimulus from the US economy gradually but that he was ready to take stronger action if necessary.
Although the reaction in financial markets was muted, economists said the comments marked a significant shift in Fed rhetoric, with inflation starting to take centre stage.
"The committee is of the view . . . that monetary policy accommodation can be removed at a pace that is likely to be measured," Mr Greenspan said.
"The conclusion is based on our current best judgment of how economic and financial forces will evolve in the months and quarters ahead."
"Should that judgment prove misplaced, however, the committee is prepared to do what is required to fulfil our obligations to achieve the maintenance of price stability so as to ensure maximum sustainable economic growth."
The comments suggest that the Fed is now sufficiently confident about the pace of the US recovery to turn its attention away from protecting growth towards warding off inflation.
In the three months to April, the annualised rate of consumer price inflation, excluding volatile food and energy prices, has accelerated to 3.3 per cent compared with 0.8 in the three months to December.
"This is a sign that the Fed is confident that it has won the battle against deflation and wants to make sure it doesn't start a new problem of inflation," said Mr Jim O'Neill, head of economics at Goldman Sachs.
The yield on the 10-year Treasury bond rose 4 basis points to 4.8 per cent - leaving the yield 20 basis points up over the past two weeks.
The dollar also rose slightly against the euro.
The Fed chairman also gave the clearest sign yet of his concern that the climbing cost of oil may start to feed through into higher prices across the economy rather than just in energy products.
"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."
Mr Ray Attrill, director of research at 4Cast, the consultancy, said: "The Fed needed to respond to carping in the market that they had not been paying sufficient attention to inflation. With these comments, Mr Greenspan has given himself room to manoeuvre."
- (Financial Times Service)
