American interest rates will be raised to contain a booming economy and ensure that its record-breaking growth continues, its central bank chief Alan Greenspan has warned.

In one of his trademark 'early warnings' of a rate rise to come, Mr Greenspan said the main danger of overheating came from the fast rise in share prices.

"Through the so-called 'wealth effect,' these gains have tended to foster increases in ... demand beyond increases in supply. It is this imbalance ... that contains the potential seeds of rising inflationary and financial pressures that could undermine the current expansion," he said.

Mr Greenspan, chairman of the central bank, the Federal Reserve, also acknowledged that there appeared to have been some fundamental change in the economy.

But he added that "it may be many years before we fully understand the nature of the rapid changes currently confronting our economy."

He told the Economic Club of New York that the Fed did not have the luxury to wait until the new balance of forces shaping the economy came into clearer focus.

Debilitating halt

At the moment "there remain few evident signs of geriatric strain that typically presage an imminent economic downturn", he said.

"It has become increasingly difficult to deny that something profoundly different from the typical postwar business cycle has emerged.

"Not only is the expansion reaching record length, but it is doing so with far stronger-than-expected economic growth. More remarkably, inflation has remained subdued in the face of labour markets tighter than any we have experienced in a generation," he added.

But the rise in wealth from equity prices was one of the imbalances which could bring the "economic expansion, its euphoria, and wealth creation to a debilitating halt".

"In the end, balance is achieved through higher borrowing rates," he said.

Technological gains

The Federal Reserve's next interest rate setting meeting is on 1 February, when they are widely expected to push rates up by a quarter point to 5.75%.

The American economy is about to enter a record ninth year of expansion.

Growth is currently running at more than 5%, unemployment is at its lowest point for 30 years and share prices continue to smash through record levels.

The accepted view is that as unemployment falls, employers have to pay higher wages to attract staff, stoking inflation as they then have to put up prices of their goods.

But new technology and productivity gains have, so far, more than compensated for increased earnings, with none of the inflation growth which might historically have been expected.

'Groping' at limits

Mr Greenspan said: "There has to be a limit to how far the pool of available labour can be drawn down without pressing wage levels beyond productivity" and causing inflation to rise.

"Admittedly, we are groping to infer where those limits may be. But that there are limits cannot be open to question."

Mr Greenspan was earlier this month reappointed by President Bill Clinton for a fourth term at the helm of the Federal Reserve.