US Fed 'ready to raise interest rates'

Alan Greenspan yesterday brushed aside worries the US economy was faltering, saying the economic recovery was now "self-sustaining", and indicating that the Federal Reserve was ready to raise interest rates more swiftly if circumstances so dictated.

Alan Greenspan yesterday brushed aside worries the US economy was faltering, saying the economic recovery was now "self-sustaining", and indicating that the Federal Reserve was ready to raise interest rates more swiftly if circumstances so dictated.

In his keenly awaited twice-yearly testimony to the Senate Banking Committee, the Fed chairman said the current slowdown in consumer spending would prove shortlived. He also predicted that if rates did have to climb more vigorously from their recent 45-year lows, the economy would have no trouble coping.

His upbeat remarks - which boosted the dollar and stocks but hit bond prices - suggest that the central bank will boost its benchmark short-term rate by at least 25 basis points from the current 1.25 per cent when policymakers meet next month, as part of a return to what Mr Greenspan termed "a more typical level of interest rates."

As Mr Greenspan spoke, the US central bank released its latest forecasts for 2004, showing that the Fed is expecting inflation to grow more rapidly, while growth will dip fractionally - to between 4.5 and 4.75 per cent, compared with the 4.5 to 5 per cent predicted in February. Even the more modest expansion would be the best for 20 years, and reinforce the Bush campaign's contention, less than four months before the presidential election, that the economy has definitively turned the corner.

Mr Greenspan seemed to concur. The recovery, he said, was self-sustaining, and would continue to create new jobs.

The main cloud is inflation. The Fed has raised its inflation outlook for this year to 1.75 to 2 per cent, up from its February forecast of a 1 to 1.25 per cent, as measured by a price index linked to gross domestic product and which excludes erratic components such as food and energy.

The central bank expects unemployment - the most politically sensitive indicator of all - to continue its recent gradual decline. The jobless rate is expected to finish the year at between 5.25 per cent and 5.5 per cent, compared with 5.6 per cent for June 2004, the latest month on record.

New data yesterday suggests the long-expected rise in short-term interest rates, coupled with steadily rising mortgage rates, is already affecting the housing market. Housing starts unexpectedly fell last month to their lowest level in a year. This followed a 0.3 per cent fall in industrial production in the same month.