Greenspan Allays Rate Hike Fears Fed Chairman Tells Congress That Economy Is ‘Exceptional’

Calling the economy “exceptional,” Federal Reserve Chairman Alan Greenspan indicated there is no current need to boost interest rates to fight inflation. That was all Wall Street needed to hear to send stocks and bonds soaring.

The Dow Jones industrial average jumped 154.93 points to a record high of 8,061.65.

The ever-cautious Greenspan sought Tuesday to strike a balance in delivering his midyear report to Congress. He said while he saw no evidence of increased inflation, the central bank was on the alert for faster-than-expected economic growth that could require the brake of rate hikes down the road.

But analysts and investors viewed Greenspan’s overall views about the economy as upbeat, especially because he gave no signal that any interest rate increase was imminent.

“The fear of Fed tightening has been removed at least for the foreseeable future, and that means the financial market horses can run free and unrestrained,” said Sung Won Sohn, chief economist at Norwest Corp. in Minneapolis.

Most analysts said they still expect the central bank to raise rates later this year. However, based on Greenspan’s words, they said that could be delayed until possibly November.

The Fed boosted its federal funds rate, the interest that banks charge each other, a quarter point to 5.5 percent in March. But Fed policymakers passed up chances to raise rates further at their May and July meetings. The next rate-setting session will be Aug. 19.

Missing from Greenspan’s report to Congress was any concern about the record-setting stock market. Last December, Greenspan’s worries about possible “irrational exuberance” had sent financial markets tumbling worldwide.

But Greenspan did warn that the good news on inflation is not likely to last forever.