“Federal Reserve Chairman Alan Greenspan said the central bank continues to anticipate boosting short-term interest rates at a “measured” pace, but signaled he was ready to move more aggressively if inflation rises more quickly than the Fed currently expects,” writes Bob Davis in today’s Wall Street Journal.

“Speaking via videoconference to a London monetary conference, Mr. Greenspan said the Fed ‘is prepared to do what is required’ to maintain price stability. Though he didn’t spell out what he meant, he appeared to be suggesting that the Fed wouldn’t necessarily limit U.S. interest-rate increases to quarter-percentage-point increments.”

“The Fed has been saying since May that when it lifts interest rates, now at a 46-year low of 1%, the pace ‘is likely to be measured.’ In his prepared remarks yesterday and in response to a follow-up question, Mr. Greenspan reiterated that ‘measured’ mantra. ‘So far, we have no reason to believe that we will not be able to maintain a measured pace in the elimination of an unnecessary [degree] of accommodation,’ he said.

“But he ticked off a number of areas of inflationary concern, including the ‘worrisome element’ of a persistent rise in energy prices; signs that wages are climbing faster than productivity, or output per hour of work; a ‘recent acceleration’ of core consumer prices; and ‘the restoration of a significant degree of pricing power.’ “

” ‘Business expansion,’ he added, ‘will tend to increase both real wages and interest rates.’ If protectionism were to rise, he added, that could also boost inflation because it would diminish the international competition that has helped hold prices in check.”

“The bond market saw Mr. Greenspan’s words as a sign that he is contemplating steeper increases in interest rates than had been the case earlier in the year. After Mr. Greenspan spoke yesterday, the yield on the 10-year U.S. Treasury note rose slightly. Separately, higher market rates are prompting homeowners to turn to home-equity lines of credit. The Fed is widely expected to begin raising rates after its policy-making Federal Open Market Committee meets June 29-30.”

“Tom Gallagher, an analyst at International Strategy & Investment, a New York-based economic consultant, said Mr. Greenspan was delivering a nuanced message to markets.”

“Over the past few months, bond investors have begun to worry that the Fed is too sanguine that inflation is under control. One important measure of the market’s inflation expectations comes from comparing the yields on inflation-adjusted Treasury notes and conventional ones. That has widened recently.”