WASHINGTON -- In a week jam-packed with appearances by Federal Reserve officials, investors will focus on Fed chairman Alan Greenspan's first speech of the year on Thursday for hints on the future path of US interest rates.
Financial markets almost universally expect the powerful US central bank to nudge up short-term rates for the fourth time in just seven months when policymakers next meet on 1-2 February. They are eager to hear what else Greenspan has in store for the world's top economy once that move is out of the way.
Thursday's speech before the Economic Club of New York, a high-level audience of professional economists, could be the ideal platform for Greenspan to lay out his plans for the US economy as it nears its longest-ever expansion next month.
Greenspan's topic may sound innocuous enough: technology and the economy. But when he addressed that very issue last October, the seldom forthright central banker dropped clear hints that he would need to raise borrowing costs soon to prevent the US economy from overheating.
He promptly followed up his warning with the year's final quarter-point increase in the key overnight federal funds bank lending rate in mid-November, taking it to 5.5 percent.
Greenspan has a long tradition of using his key speeches to tell financial markets what's ahead on the monetary front so as to avoid out-sized reactions among investors that may otherwise be caught wrong-footed. With just three weeks to go to the next Fed rate meeting, now is the time to start banging the drum.
"Somewhere in this speech he has to at least allude to the fact that the risks still point to higher inflation because demand increases exceed potential supply, even allowing for higher productivity," said David Jones, veteran Fed watcher and chief economist at Aubrey G. Lanston & Co in New York.
"If he doesn't say anything about those risks, I would really worry about him," Jones added.
With economic growth running at above 5 percent -- it came in at a red-hot 5.8 percent growth in the third quarter of last year -- few economists believe the good times can continue indefinitely without a pickup in inflation sooner or later.
The question Greenspan is grappling with now is whether higher productivity growth over recent years has pushed that point back, effectively raising the economy's speed limit.
But as consumers continue spending at a frenzied pace, driving them ever-deeper into debt, and the US jobs market remains tighter than at any point in the past generation, Fed observers say another tap on the brakes next month is needed. Most analysts expect further rate rises in the coming months.
"The Fed may not be content to merely track inflation," said Don Hilber, economist at Wells Fargo Bank in Minneapolis. "[Greenspan] would lose his godlike stature if he refrains from being preemptive."
US financial markets seemed to agree. Inflation-sensitive bond prices fell on Tuesday, with the bellwether 30-year Treasury bond losing a full point, after a set of strong economic data reinforced expectations of a February rate rise.
A warning by Richmond Fed president Alfred Broaddus that the strength of US domestic demand risked pushing inflation higher also did not help market sentiment. Broaddus, a voting member of the rate-setting Federal Open Market Committee this year, will speak again later on Tuesday and on Friday.
Chicago Fed president Michael Moskow is due to address the economic outlook in a speech on Wednesday, as is Philadelphia Fed President Edward Boehne. Fed Governor Edward Gramlich speaks on Thursday, completing the line-up for this week.
The recent rise in market interest rates -- bond yields move in the opposite direction to bond prices -- has gone some way toward the Fed's goal of slowing down the US economy by raising the cost of credit to consumers and businesses.
But analysts say Greenspan has to back up that trend with action if he wants to ensure a soft landing as the US economy nears a record ninth birthday at the end of February.
"He has to encourage these markets to do his job for him," said Jones. "But he also has to come through with confirming tightening actions. He can't just get away with nothing."
Greenspan is scheduled to start speaking to the private group at about 8:30 p.m. Should he refrain from any rate hints in his prepared remarks, he could instead drop the ball during a brief, scripted question-and-answer session following his speech.
