Yesterday, Federal Reserve Chairman Alan Greenspan in his semi-annual report on monetary policy assured the Senate Banking Committee that the period of low interest rates must end. He said that the U.S. economy has entered a sustainable expansion that should eliminate a June slowdown and is under no serious threat from inflation. The Fed chief told the Senate Banking Committee faster growth was creating price pressures but some of them, like energy costs, were temporary, so interest rates likely can rise to an unspecified "neutral" level at a "measured" pace.

    Greenspan said the economy was prepared for gradual rate hikes. According to him, the Fed was not yet sure whether the benign inflation environment would persist or if there were more deep seated forces at work pushing prices higher. The Fed will pay close attention to incoming cost and price data.  Should inflation pick up and make bigger rate rises necessary, "our economy appears to have prepared itself for a more dynamic adjustment". Greenspan said the Fed's benchmark federal funds rate needs to rise to a level that is considered neutral -- enough to curb inflation without depressing growth.

    The Fed expects 2004 real economic growth of 4.5 percent to 4.75 percent versus a forecast in February for growth of 4.5 percent to 5.0 percent. The central bank said so-called core inflation, which excludes energy and food costs, as measured by the Commerce Department's personal consumption expenditures index, should rise by a relatively mild 1.75 percent to 2.0 percent.

Greenspan's overall message on the economy, with just a few months left before the presidential elections, was upbeat. Greenspan also presented the Fed's latest forecasts for growth, employment and inflation this year and next.

    Stock investors took Greenspan's comments positively, driving the Dow Jones industrial average up 55.01 points, or 0.54 percent, to 10,149.07 and the high tech-laden Nasdaq Composite Index ended ahead 33.24 points, or 1.76 percent, to 1,917.07. Bond prices dropped: the 30-year U.S. Treasury bond fell nearly a full point and its yield, which moves in the opposite direction, climbed to 5.17 percent from 5.11 percent on Monday.