ALAN GREENSPAN yesterday moved to calm market fears of a half-point rise in US interest rates later this month despite an oil-driven surge in inflation.
After the headline rate of inflation in America leapt last month to its fastest annual level for three years, the Federal Reserve Chairman emphasised that he still expected interest rate rises to be gradual.
In reassuring comments that soothed markets, Mr Greenspan played down the threat of a serious inflation outbreak and said that the Fed could still afford to move cautiously in raising rates.
“Our general view is that inflationary pressures are not likely to be a serious concern in the period ahead,” he said.
Interest rate rises were “very likely to be measured over the quarters ahead”, he added as he gave evidence at a Senate confirmation hearing for his fifth term as Fed Chairman.
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Mr Greenspan’s comments helped to calm investors who have been increasingly fearful that rising price pressures might lead the Fed to opt for a hardline half-point rise in US rates on June 30.
Fund managers’ anxiety over inflation has hit its highest for about a decade, with a majority believing that the Fed now needs to push US interest rates as high as 3 per cent by next year, a survey from Merrill Lynch revealed yesterday.
Until recently, markets had been betting on a modest quarter-point rise as the Fed finally moves to lift rates from a four-decade low of 1 per cent. However, a spate of hawkish comments by Fed officials had shifted sentiment, and so Mr Greenspan’s doveish stance yesterday was seen as reassuring.
His remarks came just hours after worse than expected US inflation figures showed that prices in American shops leapt by 0.6 per cent in May, in the largest one-month gain since January, 2001. The price rise pushed America’s annual inflation rate up to 3.1 per cent in May, from only 2.3 per cent in the previous month.
The inflation surge was stoked by the rising cost of fuel for America’s drivers as crude oil prices set record highs. US gasoline prices rose by 8.1 per cent last month as the price of a gallon at the pumps set a record of $2.06 (£1.13).
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However, Wall Street focused instead on much more benign “core” inflation figures, stripping out the impact of volatile food and energy costs. Core prices for other goods rose by only a subdued 0.2 per cent last month to stand 1.7 per cent higher than a year earlier.
Those figures combined with the Fed Chairman’s comments to send shares upwards on Wall Street and also triggered a sharp sell-off in the dollar and US Treasury bonds. The Dow Jones industrial average closed up 45.70 points to 10,380.40, while the yield on US two-year Treasury notes tumbled in its biggest one-day drop since early 2002. The dollar lost about a cent against the euro, which rose to levels around $1.2151.