Federal Reserve Board Chairman Alan Greenspan said Thursday that he expects the consumer price index, a key inflation indicator, to show a smaller increase for February than it did for January.
In January, the index rose by 0.6 percent, which would translate to an annual inflation rate of 7 percent.
”I don`t think we are at a 7 percent inflation rate,” Greenspan told the House Budget Committee.
Earlier this week, the Commerce Department reported that the gross national product deflator, also a measure of inflation, rose at an annual rate of 5.3 percent in the last quarter of 1988, compared with projections of 4.7 percent. That change prompted many economists to predict that inflation was rising, which would prompt the Fed to tighten monetary policy, and which in turn could trigger a recession this year.
Greenspan told the House committee Thursday that he doesn`t believe business activity responds to Fed monetary policies as sharply as it did. Deregulation of U.S. financial institutions and increased flow of money from abroad have taken the edge over monetary policy, he said.
”But it`s a modest change, not a sea change,” Greenspan said. ”The effect is still there.”
In any case, he said, the Fed`s money-tightening policies aren`t likely to have much effect on sales of big ticket consumer durables such as automobiles.
Greenspan agreed that raising short-term interest rates will increase consumer borrowing costs, but ”not enough to have a major impact.”
Consumer interest rates are relatively high for other reasons, such as credit risk, he said.
The Fed chairman said financial markets are looking for longer-term moves, such as reducing the federal budget deficit, rather than short-term measures. He predicted that a tax increase, coupled with a new spending program, would be necessary to achieve that.
Greenspan said there was ”no question” that real long-term interest rates would fall ”markedly” if a credible multiyear deficit reduction package were enacted.
