Outlook: US interest rates

MOST Alan Greenspan speeches are so carefully crafted, balanced and qualified, that you need to be something of a mind reader to know what he is really thinking. On one of the few occasions when he did speak his mind - recklessly referring to the "irrational exuberance" of markets - he almost immediately regretted it, if only because his analysis proved to be so entirely wrong. So these days he is even more measured and Delphic than ever.

Even so, the Federal Reserve chairman's biannual Humphrey-Hawkins testimony to the US Senate yesterday contained a clear enough message - that while there is no urgent need for action, the balance of risk in the US economy is now on what he calls the upside rather than the downside. What he means by this is that the recessionary scare brought about by the collapse in emerging markets last autumn is now largely over, in the US at least, and that the most pressing concern has once again become that of a revival in inflation.

The key sentence in his speech is the one in which he asks whether the full extent of interest rate cuts undertaken at that time to address the seizing-up of financial markets remains appropriate now that those disturbances are abating. Just to ask the question is to know the answer.

With the US economy still growing at a rate that puts the rest of the world to shame, and Wall Street back to near record levels, it could hardly be argued that Americans still need cheaper money. All the evidence points to the contrary - so much so that one of the most relevant questions in international economics today is whether the Fed didn't repeat the policy mistakes of the crash of 1987 during the stock market wobble of 1998.

Plainly that is what is worrying Mr Greenspan most - that in attempting to correct a short-term crisis in financial markets, he has stoked up inflationary pressures and prolonged an ultimately unsustainable boom.

The most important conclusion to draw from all this is that if and when the long bull market in equities does draw to a close, it is much more likely to be brought to an end by the traditional means of a reduction in liquidity caused by an increase in interest rates - which in itself will be a reaction to inflationary wage pressure - than the deflationary slump many predict is awaiting the US and the rest of the world.

Booms don't die of old age; generally they are murdered by the anti-inflationary policies of the US Federal Reserve. There is no reason to believe it will be any different this time round.