Interest rate rises 'inevitable' as US economy storms ahead

The US economy stormed ahead even faster than expected in the final quarter of last year, with revised figures yesterday showing growth reached a breathtaking 6.9 per cent. This matched the rate of growth in mid-1996 and apart from that was the fastest since 1987.

The US economy stormed ahead even faster than expected in the final quarter of last year, with revised figures yesterday showing growth reached a breathtaking 6.9 per cent. This matched the rate of growth in mid-1996 and apart from that was the fastest since 1987.

Economists said the latest estimates made further rises in interest rates, to slow the expansion to a more sustainable pace, a racing certainty, with the next move likely to come in March. GDP growth in October-December was revised up from a preliminary 5.8 per cent, and compared with 5.7 per cent in the third quarter.

"There is no question growth is going to slow this year. The only questions are when and how painful the rise in rates needed to get us there will be," said Ian Shepherdson of High Frequency Economics.

Separate figures yesterday showed higher mortgage rates in the wake of interest rate rises had already had an impact, sending home sales 10.7 per cent lower in January. But further rate increases are in the pipeline.

In congressional testimony this week, Alan Greenspan, the Federal Reserve chairman, made clear the US economy was growing too fast for comfort.

Rate fears have helped drive share prices lower. Bond prices declined yesterday, and the Dow Jones closed below 10,000 - down 230.51 at 9,862.12 - for the first time since April last year. Even the high-flying Nasdaq, after an initial surge, ended the day down 27.15 at 4,590.5.

Yesterday's growth figures were almost certainly exaggerated by Y2K stockpiling, analysts said. There was an unusually big increase in business inventories, at $68.7bn compared with $38bn in the third quarter.

Government spending too surged by 9.2 per cent, an aberration due to factors such as a one-off rise in road-building expenditure.

Underlying growth was even so still above 5 per cent. The drag from the widening trade gap was less than estimated and easily offset by consumer spending, up 5.9 per cent, and business investment growth of 2.5 per cent.

The sparkling growth performance was accompanied by modest inflation of 2 per cent. While almost twice the previous quarter's rate, this remains tame.

"We're not looking at the same type of inflationary pressures that we saw back in 1994 or at times in the 1980s," said John Lonski, chief economist at Moody's Investors Services.