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Greenspan hints at pre-emptive rate rise

THE US Federal Reserve may need to raise interest rates before any sign that inflation is returning to the economy, Alan Greenspan said yesterday.

With speculation still rife that the Fed will raise rates at its next meeting in two weeks' time, the Fed chairman appeared to be looking towards a reversal of the interest rate cuts last year which stoked the US recovery.

"It is useful to pre-empt forces of imbalance before they threaten economic stability," he said. "When we can be pre-emptive we should be, because modest pre-emptive actions can obviate the need for more drastic actions at a later date that could destabilise the economy."

Mr Greenspan, in testimony to Congress, said "developing imbalances" could cause problems for the economy, with the trade deficit widening and personal savings at new lows. The trade gap closed slightly in April to $18.94bn from $18.95bn in March, the Commerce Department reported yesterday. The figures showed the first increase in US exports since last October. But the deficit is still heading for another record this year, after last year's revised $164bn.

Markets are expecting at least one increase in rates this year, although they are also speculating that the Fed will move again later in the year. So widely discounted is the rise that although stocks fell at the opening of the New York Stock Exchange yesterday, they rose afterwards and bonds rallied.

Mr Greenspan again pointed to concerns about the ability of the US economy to maintain its momentum when unemployment is at such low levels. "To be sure, labour market tightness has not, as yet, put the current expansion at risk," he said. "But should labour markets continue to tighten, significant increases in wages, in excess of productivity growth, will inevitably emerge." Monetary policy operates with a significant lag, he added.

The latest weekly figures for the labour market showed a large drop of 28,000 in those seeking unemployment benefit. A Fed survey of local conditions showed growing labour market tightness and wage pressures

Lawrence Summers, nominated by President Clinton as the new Treasury Secretary, told Congress in separate testimony that he would not change the policies of his predecessor, Robert Rubin.