Fed set to `nip inflation in bud', warns Greenspan

ALAN GREENSPAN warned yesterday that the US Federal Reserve would act "promptly and forcefully" to nip inflation in the bud.

The Fed Chairman also advised Congress to hold off tax cuts, saying uncertainty about the economy meant the big budget surplus could not be guaranteed to last. He added that a big tax cut now would run the risk of overheating the economy.

Mr Greenspan repeated his concern about the dangers in "euphoric" share price rises. The warning was read as a signal that it is only a matter of time before interest rates rise again, following June's increase.

However, the Fed Chairman's remarks on the economy, in a second session of Congressional testimony, left analysts divided as to whether the increase would come when the Fed's Open Markets Committee meets in late August or be postponed until October.

"A move in August is possible if we see any upward surprises in the data. But mortgage rates and corporate bond rates have already increased substantially. There is a lot of tightening already in the system," said James O'Sullivan, an economist at JP Morgan in New York.

Figures for unemployment and earnings in July, due at the end of next week, will come in for special scrutiny as Mr Greenspan emphasised the tight jobs market. He said yesterday: "There can be little doubt that, if the pool of job seekers shrinks sufficiently, upward pressures on wage costs are inevitable."

Most economists believe the economy has started to slow, a view expected to be confirmed today by figures for second-quarter growth. The Commerce Department reported yesterday that growth in orders for durable goods such as cars, appliances and industrial equipment tailed off last month, down to 0.3 per cent from 0.8 per cent in May.

New orders for industrial machinery - including computers - tumbled 5.4 per cent following a 4.5 per cent decline in May.

There was little market reaction to Mr Greenspan's remarks. The Dow Jones index initially fell 38 points to 10,941. The yield on benchmark Treasury bonds climbed to 6.03 per cent, having broken through the 6 per cent barrier earlier in the week.

On the foreign exchanges the dollar gained a little ground against the yen. Japanese ministers indicated that a 500 trillion yen supplementary budget was on the cards if figures for second-quarter growth in the economy are disappointing. It would be the second supplementary budget in the current fiscal year.