US markets reassured by Greenspan testimony

The Federal Reserve chairman Mr Alan Greenspan last night sent the US stock market surging by signalling his willingness to leave interest rates unchanged in the next few months in the face of slowing demand. In his semi-annual HumphreyHawkins report to Congress, Mr Greenspan eased market fears of imminent tightening with his observation "demand growth does appear to have moderated". The Dow soared at one point almost 150 points, back through the 8000 barrier, as dealers and analysts hailed Mr Greenspan's comments as a signal to buy. "All his comments are bullish," one said. This was in sharp contrast to the tumble caused last December when the Fed chairman warned of "irrational exuberance" in financial markets. Since then the Dow has risen 1500 points.

Last night the Dow close at a record 8,060.02, a rise of 153.3.

The US economy grew at a searing 5.9 per cent annual rate in the first quarter, but Mr Greenspan believes that the pace would moderate in the second quarter.

Delivering an upbeat assessment of an economy, which he described as a "puzzle", Mr Greenspan noted that inflation has remained restrained even though unemployment this year has fallen near a 25-year low and the economic expansion is now the third longest in history.

The Fed chairman, however, gave his ritual warning about the need for Fed vigilance. "With considerable momentum behind the expansion and labour market utilisation rates unusually high, the Fed must be alert to the possibility that additional action might be called to forestall excessive credit creation," Mr Greenspan warned.

But analysts interpreted his remarks as a willingness to leave rates unchanged until the end of this year or early next year.

Mr Greenspan, as well as discussing the performance of the US economy, refuted the notion the Fed was experimenting to see how fast it could push growth.

The chairman's remarks before the House Banking Committee sent share prices soaring, as they suggested that, while the Fed remains acutely sensitive to signs of inflation, a short-term rate increase was not imminent.

Mr Greenspan said he had "no doubt" that the federal funds rate, which the Fed uses to influence the cost of credit, would have to be increased from its current level of 5.5 per cent "to foster sustainable growth and low inflation". The Fed's Open Market Committee increased the rate by a quarter of a point in March but took no action at its May and August meetings.

The chairman made no secret of his worries over increasingly tight labour markets, which carry with them the chance that wage pressures and hiring costs could be passed on to consumers.

Unemployment has been hovering around 5 per cent, reaching its lowest levels in some 25 years.

For that reason, Mr Greenspan said, the economy appeared to be on an "unsustainable track". He cautioned that, unless demand for goods and services "increases more slowly than it has in recent years . . . imbalances will emerge". But Mr Greenspan tempered his analysis by noting that demand had, in fact, eased in recent weeks and that the Fed was "reasonably confident inflation will be quite modest for 1997 as a whole". Consumer prices will likely rise only 2.25 to 2.50 per cent this year, which he described as a significantly slower pace than had been foreseen in February.

US economic growth should likewise flag in coming quarters, with real gross domestic product expanding three to 3.5 per cent for the year as a whole, down from 5.9 per cent recorded in the first quarter.

Next year, according to the chairman, should see higher rates of inflation - 2.5 to 3 per cent - in response to increases in food and energy prices. - (Guardian Service, AFP)