Greenspan eases inflation worries

Investors received some reassurance about inflation and the economy from Federal Reserve chairman Alan Greenspan today – and sent stocks higher as the market’s interest rates worries ebbed.

Investors received some reassurance about inflation and the economy from Federal Reserve chairman Alan Greenspan today – and sent stocks higher as the market’s interest rates worries ebbed.

Testifying before Congress at his reconfirmation hearing, Greenspan said that, in the short term, inflation was not a major concern, though he reiterated that the Fed would be aggressive if need be.

His comments came shortly after the Labour Department released its latest Consumer Price Index.

While the CPI reading was higher than expected, investors were cheered that the “core” CPI – without energy and food prices – was in line with expectations, showing that economic growth, and accompanying inflation, may be manageable.

“I think the core number took a little concern out of the market,” said Joseph Battipaglia, chief investment officer at Ryan Beck & Co. “It doesn’t change the fact that interest rates will rise, but the pace that the Fed has to raise interest rates is the key question. This could call for the more measured pace.”

The Dow Jones industrial average rose 45.70, or 0.4%, to 10,380.43. It had been more than 90 points higher earlier in the session before profit taking ate into the gains late in the day.

Broader stock indicators also had healthy gains. The Standard & Poor’s 500 index climbed 6.71, or 0.6%, to 1,132.00, and the Nasdaq composite index was up 25.61, or 1.3%, at 1,995.60.

The CPI reading for May was 0.6% higher, the biggest increase since January 2001. Economists had been expecting a 0.5% increase. However, with food and energy costs taken away, the core CPI rose just 0.2%, meeting the forecast.

With the Organisation of Petroleum Exporting Countries promising to increase output to combat high oil prices, and with gasoline prices falling last week for the first time since mid-December, some analysts felt energy prices may soon come under control, removing one of inflation’s biggest drivers.

It remained unclear, however, whether the Fed would raise the nation’s benchmark interest rate by a quarter percentage point or a half point when it meets June 29.

Greenspan gave no clues as to the Fed’s thinking before the Senate Banking Committee, which was holding a hearing on his renomination as Fed chairman.

Wall Street, however, was beginning to think that a half-point rate rise might be too much, and could hurt the market’s chances for a strong rally.

“I don’t think this warrants a half-point,” said Brian Belski, market strategist at Piper Jaffray. “I think we see a quarter-point in June and then a nice rally through the summer until we start getting some noise from the election.”

Lehman Brothers Inc. slumped US$3.07 to US$73.02 despite announcing a 23% rise in second-quarter profits. The investment bank beat Wall Street estimates by 10 cents per share.

The merger between J P Morgan Chase & Co. and Bank One Corp was approved by the Fed late Monday, clearing a major regulatory hurdle. The companies will officially merge July 1. J P Morgan Chase rose 9 cents to US$37.25, while Bank One climbed 21 cents to US$49.09.

Boeing Co. gained 42 cents to US$49.25 after the Pentagon awarded the aerospace manufacturer a US$3.89 billion contract to develop a new long-range patrol aircraft for the Navy to replace Lockheed Martin Corp’s P-3 Orion. Lockheed was down 61 cents at US$49.84.

Advancing issues outnumbered decliners by more than 3 to 1 on the New York Stock Exchange, where volume came to 1.45 billion shares, compared with 1.18 billion at the same point Monday.

The Russell 2000 index of smaller companies was up 10.25, or 1.8%, at 567.92.

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