Fed expects to keep raising rates

The US economy remains solid and the Federal Reserve expects to continue raising interest rates to keep inflation in check, Alan Greenspan, chairman of the central bank, said yesterday.

But he identified three "significant uncertainties" in the generally rosy outlook - inflation pressures from the labour market, high energy prices and low long-term interest rates.

He also stepped up his warning about the booming housing market, pointing to "speculative fervour" in some areas.

Bonds and stocks fell and the dollar strengthened as Mr Greenspan made it clear that the policymaking federal open market committee was not considering a pause in its tightening campaign because of the risk of rising inflation.

Mr Greenspan told the House of Representatives financial services committee: "Our baseline outlook for the US economy is one of sustained economic growth and contained inflation pressures. Realising this outcome will require the Federal Reserve to continue to remove monetary accommodation." Recent data supported the view that strong fundamentals would support continued growth at close to the economy's potential rate, Mr Greenspan said, despite high oil prices and the drag from weak growth abroad.

There was only a modest reduction in the FOMC members' growth projections - 3.5 per cent this year and the same rate or slightly lower next year.

The inflation forecasts were a little higher than February's but policymakers expect core inflation to remain towards the top of the committee's 1-2 per cent range.

Mr Greenspan said energy prices and the uncertain outlook for unit labour costs would keep the committee focused on inflation risks. "Over most of the past several years, the behaviour of unit labour costs has been quite subdued. But those costs have turned up of late and whether the favourable trends of the past few years will be maintained is unclear."

Another rise in energy prices could cut into household and business spending and damp economic growth. He said futures markets suggested the market did not expect any significant fall in energy prices soon.

Low long-term interest rates, at a time when short-term rates have risen from 1 to 3.25 per cent in a year, was a third uncertainty. This in part reflected a moderation in long-term inflation expectations and the combination of high savings and weak investment outside the US.