Greenspan warns of further US rate rises

Alan Greenspan, the Federal Reserve chairman, signalled yesterday that US short-term interest rates would continue to rise. He also issued his sternest warning yet on the need for the Bush administration to reduce the country's massive trade and budget deficits.

Alan Greenspan, the Federal Reserve chairman, signalled yesterday that US short-term interest rates would continue to rise. He also issued his sternest warning yet on the need for the Bush administration to reduce the country's massive trade and budget deficits.

Delivering keenly awaited testimony to the Senate Finance committee, Mr Greenspan said that despite six consecutive monthly increases in the benchmark federal funds rate to 2.5 per cent, US rates in general remained "fairly low".

He painted an upbeat picture of the economy in early 2005, with growth running at upwards of 3 per cent, and with inflationary expectations "well- anchored". Even so, the likelihood is that the Fed will continue to nudge rates higher toward the so-called "neutral level" of 3 to 4 per cent.

But Mr Greenspan left no doubt that his main worry was the huge and rising imbalance in both America's internal and external finances. It was "imperative," he said, for the US to boost its savings rate, to lower the current account deficit, now running at almost 6 per cent of GDP, and bring down a budget deficit forecast to be more than $400bn for 2005/2006.

The Fed chairman gave his blessing to President George Bush's controversial plan to part-privatise Social Security. But even the administration concedes that the transition will require $754bn of new borrowing in the next 10 years, with even more thereafter.

"We have to get the deficit down, before we run into really serious problems, beyond 2008," Mr Greenspan said.