Greenspan says US rates will rise but rules out imminent increase

Federal Reserve chairman Mr Alan Greenspan said yesterday that US interest rates must rise at some point, but seemed to rule out an imminent increase by saying more vigorous growth hadn't yet sparked broad price pressures.

In closely watched testimony to the congressional Joint Economic Committee, Mr Greenspan repeated that a long period of disinflation had ended and said US central bank policymakers were on heightened alert about the need for higher rates.

But he offered no clue about timing.

"As I have noted previously, the federal funds rate must rise at some point to prevent pressures on price inflation from eventually emerging," he said.

"As yet, the protracted period of monetary accommodation has not fostered an environment in which broad-based inflation pressures appear to be building."

Financial markets were unsettled on Tuesday by Greenspan's declaration that disinflation - a main justification behind the long season of low rates - was no longer an issue.

But yesterday they focused instead on his reassuring words about the lack of upward price pressure.

The dollar lost ground and Treasury bond prices edged up on hopes that rate rises were not as near as some investors feared after Tuesday's remarks.

Faster growth in the US and global economies was showing up in faster price rises in early stages of production and in energy markets, but this was not troublesome because productivity was keeping a lid on labour costs, Mr Greenspan said.

"When you have the benefit of a very significant increase in output per hour, it means you can go at a much more measured pace than you would be required to do in the past," he said.

Mr Greenspan was decidedly upbeat about the economy's prospects, saying job markets were on the mend "after a protracted period of weaknesses" and the buoyant mood was spilling into corporate spending plans.

Later yesterday the Fed issued its so-called "beige book" summary of national economic conditions that said there was a noticeable improvement in every sector from manufacturing to tourism and services as winter ends.

"Economic activity increased across the nation from mid-February through early April," the survey compiled by the Minneapolis regional Fed bank said.

Hiring was stronger but wage increases remained modest, indicating little inflation threat to the economy. - (Reuters)