Greenspan indicates US rates will increase

US interest rates are still "fairly low" after six straight increases, Federal Reserve chairman Mr Alan Greenspan said yesterday, warning that despite the economy's good health, fiscal discipline is vital.

Financial markets took Mr Greenspan's testimony to the US Senate Banking Committee as confirmation that more interest-rate hikes lie ahead in a cycle that began in June, and as a vote of confidence in the expansion.

"All told, the economy seems to have entered 2005 expanding at a reasonably good pace, with inflation and inflation expectations well-anchored," Mr Greenspan said in the first of two days of semiannual economic testimony before Congress.

During lengthy questioning, which focused primarily on President George W. Bush's push to restructure social security, the influential Fed chief backed the idea of allowing workers to set up private investment accounts.

But, he said, that alone would not avert the programme's looming financing woes as "baby boomer" Americans retire in droves after 2008.

In its report to Congress, the Fed's policy committee raised its estimate for 2005 economic growth to 3.75-4 per cent from an earlier estimate of 3.5-4 per cent.

Bond prices tumbled on the prospect of higher rates. The dollar rallied initially but, by midday, had given up much of the gains. Stocks were moderately lower, apparently in the belief that costlier credit will make it harder to keep boosting profits.

Financial markets combed through Mr Greenspan's remarks for any sign that a pause in rate rises might be near, but he offered none. Mr Greenspan "is sending a clear signal to the markets to expect continued gradual rate hikes", said Mr Paresh Upadhyaya, a portfolio manager with Putnam Investments in Boston.

Since it began raising rates from a low of 1 per cent in mid-2004, the Fed has ratcheted its trendsetting federal funds rate up to 2.5 per cent.

The 78-year-old Fed chairman, whose term expires on January 31st, tempered his optimism about the short-term economic outlook with warnings that relatively tranquil conditions should not be taken for granted.

"History cautions that people experiencing long periods of relative stability are prone to excess," Mr Greenspan said. "We must thus remain vigilant against complacency."

He said that it was "imperative to restore fiscal discipline" in the United States to help narrow its huge current account deficit.