Greenspan Talks of Increase in U.S. Interest Rate

New York stock indices took a plunge with the rising speculation of an interest rate hike that came after the comments from U.S. Federal Reserve chairman Alan Greenspan on April 20 who said, “The threat of deflation is over in the United States.”

Chairman Greenspan told the Senate Banking Committee that a long period of concern over deflation was over, taking various indices into consideration.

The Federal Reserve Board raised the issue about the economic stagnation, making a statement of unwelcome deflation 11 months ago, and kept the federal funds rate on overnight loans down to its lowest level since 1958.

He also said that “industry appears to have been sufficiently mindful of interest rate cycles,” projecting that banks are ready to handle an increase in interest rates. Wall Street experts interpreted Mr. Greenspan’s remark about the overall industry being safe from the risks of higher interest rates, with the exception of some banks, as a prediction of a hike in interest rates.

Experts forecasted that a statement that will echo Mr. Greenspan’s remarks will be presented at the Federal Open Market Committee scheduled for May 4, and estimated that the interest rate will be increased at committee meetings either in June or August, an earlier date than was previously predicted.

After the release of Mr. Greenspan’s comments, Nasdaq dropped over two percent, and the Dow and the Standard & Poor’s 500 Index fell 1.2 percent and 1.6 percent, respectively. Treasury bond yield on the 10-year note, a benchmark for many consumer-borrowing rates, rose to 4.4 percent, up by more than one percent from the day before. The exchange market responded to the news as well with the U.S. dollar gaining strength against the Euro.

Kwon-Heui Hong konihong@donga.com