US markets put on edge: Bond and share dealers fear inflation horse has bolted

BOND AND stock markets are expected to open in tense mood this morning as dealers await testimony to Congress tomorrow from Alan Greenspan, chairman of the US Federal Reserve. The fear is that he may hint at another rise in short- term interest rates in the next two months.

US Treasury bonds fell sharply last week on fears of rising inflation and worries over Mr Greenspan's testimony on monetary policy. Some US bond market participants warned that the rise in Fed Funds, to 3.25 per cent, early this month may have come too late.

Bob Giordano, chief economist of Goldman Sachs in New York, said: 'The markets fear that the Fed has already acted too late and the inflation horse is out of the barn.'

Mr Giordano said the market was excessively worried about inflation because it believed that robust growth would persist.

Based on his expectations that expansion would ebb to an annual rate of between 2.5 and 3 per cent from around 6 per cent currently, he forecast that Fed Funds might only rise another quarter or half-point this year. 'But I don't think that market sentiment will change until there is evidence of that slowing.'

But Michael Strauss, of Yamaichi International (America), said: 'Do I think we're going to have problems with Greenspan's testimony? Absolutely I do.' Offering a more bearish forecast, he predicted a 4 per cent Fed Funds rate by the year-end with long bond yields climbing to 7 per cent. Fed Funds are set to climb to 5 per cent by mid- 1995, Mr Strauss said.

'The reality is we are in an era of strong growth and mounting capacity strains are going to boost industrial pricing power.'

However, there were signs in New York this weekend that Mr Greenspan might attempt to obscure his message. 'He faces a hostile audience in Congress,' Mr Giordano said. 'Unemployment is sticky and inflation is low, so Congress is asking why short-term rates have gone up.'