FED SIGNALS RATE HIKE; INVESTORS TAKE GREENSPAN'S THIRD RECENT WARNING IN STRIDE.

Byline: Tom Walker Cox News Service

Federal Reserve Chairman Alan Greenspan delivered his third inflation warning in two months on Wednesday. It didn't produce the immediate seismic waves of earlier speeches, but it left analysts braced for at least one more interest rate hike this year.

In the second stage of his semiannual Humphrey-Hawkins testimony, Greenspan fueled fears of higher rates by telling the Senate Banking Committee that the Fed is ready to move ``promptly and forcefully'' against any sign of renewed inflation.

It was the same message he delivered to the House Banking Committee last week and to the Joint Economic Committee in June.

Stock traders, however, apparently paid as much attention to a Financial Accounting Standards Board decision on research and development costs as to Greenspan's testimony, boosting technology stocks and giving the Nasdaq composite index its second straight gain - 0.99 percent.

The Dow Jones industrial average posted the only loss - 0.06 percent - among major stock indexes, and nervous bond traders failed to sustain enough buying to hold the 30-year Treasury yield below 6 percent, where it traded briefly.

Now that the second-quarter earnings season is ending, analysts say investors' attention will turn increasingly to inflation and interest rates as engines of change.

``As long as the economy is still strong and inflation is zero, I don't see a lot of problems coming for the market,'' said Fred C. Allvine, director of Georgia Tech's Stock Market Project. ``But if we were to see inflation numbers coming in higher, the market could get a chill.''

On Wednesday, Greenspan again defended the strategy of ``pre-emptive'' strikes in the form of higher interest rates at the earliest signs of inflation. He warned especially of wage inflation, because tight labor markets threaten to push wages higher despite productivity gains.

The Fed's policy-making Open Market Committee raised the short-term federal funds rate by a quarter of a percentage point to 5 percent on June 29, the first rate hike since March 1997.

While the Fed indicated at the time that it had adopted a ``neutral'' stance toward additional increases, some analysts believe another increase is in the offing, maybe as early as the Fed's next meeting Aug. 24.

``Our view is the Fed is still leaning toward raising rates and probably will do so at their August meeting,'' said First Union economist Jay H. Bryson. He said inflation will be a threat as long as the economy grows more than 3 percent per year.

Other analysts think Greenspan is trying to use persuasion to get consumers and businesses to spend less, and investors to slow the pace of the bull market.

``Our take on this is that he didn't say anything new, that he is jawboning,'' said Scott E. Marcouiller of A.G. Edwards & Sons.

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Photo

PHOTO Alan Greenspan

Ready to move against inflation