(February 18) – “U.S. Federal Reserve Chairman Alan Greenspan is taking a harder line on the perils of rapid growth, signaling that the Fed will keep raising interest rates unless consumer spending and the stock market quickly cool down,” Jacob Schlesinger, reports in this morning’s Wall Street Journal.

“In his semiannual economic presentation to Congress, Mr. Greenspan dropped his assertion — made a month ago — that the Fed’s attempts to rein in the economy with earlier interest-rate increases were “well advanced.”

“Instead, he said Thursday that investor optimism and a bullish stock market have “to date … more than offset” the effects of higher rates and that spending even in sectors of the economy normally considered sensitive to higher rates “has remained robust. ‘There is, he said, ‘little evidence that the American economy … is slowing appreciably.’

“In a booklet presented to the House Banking Committee accompanying Mr. Greenspan’s testimony, Fed staffers wrote that the continued surge in demand “implies that the level of interest rates needed to align demand with potential supply may have increased substantially.”

“Markets have long been expecting the Fed to boost its target for the federal-funds rate — the rate at which banks lend to each other overnight — by at least a quarter of a percentage point when policymakers next meet on March 21. Many investors have been expecting at least another half-point increase by the summer.

“After Mr. Greenspan’s remarks, some Fed watchers said the odds of even more action were now higher. ‘We expect the Fed to tighten at the next two meetings … and hope that will be enough,’ Merrill Lynch & Co. economist Bruce Steinberg wrote. ‘But the risk is that the Fed will end up tightening three or four more times this year.’ The federal-funds rate target is currently 5.75%, following four quarter-point increases since June.

“Still, despite his mounting concerns about inflationary pressures, Mr. Greenspan suggested that he was likely to keep his gradualist pace of raising rates a quarter-point at a time, rather than moving — as some analysts have speculated — in more drastic half-point steps. ‘A stable, incremental policy for monetary authorities is always best if that’s feasible,” he said in response to a question from House Banking Chairman Jim Leach.

“Besides, Fed officials have suggested that they can keep moving in quarter-point steps as long as inflation remains merely a worry and not a reality. The latest data continue to show that is the case. Before Mr. Greenspan’s morning appearance, the Labor Department released its estimate for wholesale inflation in January, showing that prices were flat. That was a better performance than analysts had forecast and an even slower pace than December’s tame report.

“Stocks were mixed following the closely watched testimony. The Dow Jones Industrial Average ended the day down a modest 46.84 points to close at 10514.57. The technology-driven Nasdaq Composite Index soared 121.27 points to close at a new record high of 4548.92.