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Greenspan doesn't expect loan rates to keep rising

Federal Reserve Board Chairman Alan Greenspan said Thursday that a recent rise in long-term interest rates fueled by prospects for the development of Eastern Europe probably would not continue. Greenspan, presenting the central bank's semiannual report to Congress, said investors are rushing to take advantage of tremendous opportunities as Eastern European nations emerge from four decades of communist rule.

"This is an extraordinary change in the nature of world savings and investment, and I don't think it has any exact historical precedent," he said.

As a result, long-term interest rates have been rising worldwide as the United States and other countries compete for funds. Long rates started heading up in early January, with the 30-year U.S. Treasury bond hitting a nine-month high of 8.66 percent on Tuesday.

But Greenspan told the Senate Banking Committee the trend probably would not continue unless some currently unknown need for investment is revealed.

"There is a very general knowledge of the size of the potential investment, and I would suspect that most of the information about this is already in the markets," he said. "Hence, unless something fundamentally new occurs .


. I'm not that concerned that interest rates would just continue up."

Sen. Donald W. Riegle Jr., D-Mich., chairman of the committee, said the United States, by relying on foreigners to help finance trade and federal budget deficits, is in danger of losing control over domestic interest rates and of its economy in general.

"I must tell you I think we are boxing ourselves in," he said. Riegle said research by his staff shows that foreigners last fall held about 20 percent of outstanding U.S. government debt, up from 15 percent five years earlier.

On another topic, Greenspan said that while he was surprised by certain aspects of January's sharp jump in consumer prices, he was not worried that inflationary pressures were accelerating.

Greenspan was questioned at length about his views on inflation in light of Wednesday's Labor Department report that consumer prices shot up by 1.1 percent in January, the biggest monthly increase in seven years.

Despite the surge, Greenspan said he was comfortable with the Fed's forecast that prices will rise between 4 percent and 4.5 percent this year, although he conceded that some of the specific components of the January price surge were surprising.

"As best as we can judge, while the rate of inflation is higher than we would like, there is no evidence that it is accelerating," Greenspan said. "While I did not like the statistic published (Wednesday), it did not give me any great concern."