Greenspan gives signal that interest rate cut is coming

THE WORSENING global economic crisis led America's central bank to signal an interest rate cut yesterday. Alan Greenspan, Chairman of the Federal Reserve, said it was important to act quickly to ease the problems of Asia and Russia.

"I do think that we have to bring the existing instability to a level of stability reasonably shortly to prevent the contagion from really spilling over and creating some very significant kinds of problems for all of us," he said in Congressional testimony. "I think we know where we have to go."

Mr Greenspan's words were taken by investors as a clear signal that a rate cut is close, and US stocks soared as he spoke. The Dow Jones index closed up 257.21 points, or 3.2 per cent, at 8154.41.

Mr Greenspan said policy-makers should be "especially sensitive to the deepening signs of global distress," and that worldwide economic problems would help to keep US inflation under control. "Looking forward, the restraining effects of recent developments on the US economy are likely to intensify," he said.

For most of this year, the Fed has been more concerned with the threat of a resurgence of inflation than with economic weakening. But the Federal Open Market Committee, which sets US monetary policy, had shifted towards a more neutral stance at its August meeting, Mr Greenspan said, as the stock market tumbled and the Asian crisis gathered pace.

"Since then, deteriorating foreign economies and their spillover to domestic markets have increased the possibility that the slowdown in the growth of the American economy will be more than sufficient to hold inflation in check," he said, indicating that at its September meeting next Monday, the Fed will shift to a presumption that any rate change will be downwards.

That meeting comes on the eve of the annual meeting of the International Monetary Fund and the World Bank in Washington, where there is bound to be pressure for easier monetary conditions.

The International Monetary Fund yesterday admitted its policies had exacerbated the Asian and Russian financial crises. Michel Camdessus, IMF managing director, said: "Yes, we made errors. For instance, we did not take notice of information on short-term capital transactions soon enough.

"Our member states simply did not have a genuine machinery of information before the crisis. We should have fought earlier for supervision of the financial sector."