Federal Reserve Chairman Alan Greenspan will display his inflation-fighting credentials on Capitol Hill this week even as he seeks to assure lawmakers the central bank wants a vigorous expansion, analysts say.
Greenspan goes before the Senate Banking Committee on Tuesday as it considers the 78-year-old central banker's nomination for a fifth, and final, term at the Fed's helm.
The panel is expected to vote on the nomination within days of the hearing, paving the way for full Senate approval before Greenspan's current term expires on June 20.
As always, financial markets will examine the Fed chief's comments closely for any hints on the interest-rate outlook. A quickening of inflation has investors on alert for signals on how fast and how far rates will rise.
Fed officials seemed keen last week to ease any worries the central bank was behind the inflation curve.
Greenspan said early in the week that while the Fed should be able to be "measured" in raising borrowing costs, it will do what it must to keep inflation from spinning out of control.
He is likely to deliver a similar message on Tuesday.
The Fed is expected to push up short-term interest rates from their current 1958 low of 1 percent after a meeting on June 29-30. It would be the first rate hike in four years and analysts expect it will be the first of many.
"He'll probably get pressed on inflation and, I think, how aggressively they'll tighten up," said former Fed governor Susan Phillips. She noted that many investors wonder if they should brace for a repeat of 1994 when rates shot up from 3 percent to 6 percent during the year.
Fed officials on Friday tackled the 1994 question. Atlanta Fed President Jack Guynn said he did not see a repeat of those rapid rises and Sandra Pianalto, head of the Cleveland Fed, ticked off differences between then and now.
But the word on almost every Fed official's lips last week was credibility -- essential for keeping inflation expectations from taking hold.
"The market is not going to respond favorably and you're not going to help the situation if the market comes to believe that we are moving too slowly and we're letting the situation get out of control," Poole told Reuters.
Wall Street and Main Street must have faith in the Fed's ability to keep prices stable to prevent a self-reinforcing spiral where expectations for higher costs lead to rising wage demands and business price rises.
"When you talk about Greenspan's legacy, you've got to say he certainly has great credibility in inflation fighting. I don't think at this stage of his career he wants to jeopardize that," said Greg Valliere of Schwab Soundview Capital Markets.
"I think he'll still sound agnostic on whether we are about to see a significant rise in inflation, but I think he has to sound a little more vigilant in terms of the Fed's response if we do get some more signs of inflation."
Analysts said Greenspan would probably leaven his rate-hike talk with optimistic words on the economy.
"It's a balancing act as the Fed always faces. You want to contain inflation but you do not want to knock this expansion off the tracks," said Investors' Security Trust Co. Chairman David Jones, a veteran Fed watcher.
Nomination hearings are rarely the venue for detailed economic exposition. If history is a guide, Greenspan's opening remarks will likely be brief.
His nomination is expected to be smooth sailing. "If the economy were really not showing signs of improvement, it might be possible that there could be a little bit of political posturing," said Phillips, who expects Greenspan will be received warmly.