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Last Updated: Wednesday, 21 April, 2004, 15:03 GMT 16:03 UK
Rates will have to rise, says Fed
Alan Greenspan
Inflation pressure could emerge, Mr Greenspan said
Federal Reserve Chairman Alan Greenspan has said the US economy is in vigorous expansion and may need higher interest rates to keep inflation at bay.

But he said he was unconcerned about inflation at present, which suggests he may not be in a hurry to raise interest rates from their 46-year low of 1%.

He made his comments to Congress' Joint Economic Committee.

They followed similar remarks a day before, and many investors responded by selling off shares at Wall Street open.

'Price stability'

"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 in testimony prepared for the committee.

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

He also said that a period of disinflation, or slowing inflation rates, seemed over but high rates of productivity growth, and unused economic capacity, were restraining upward prices pressures "and should continue to do so for a time."

His comments marked the second signal in two days that the Fed was beginning to edge closer to raising interest rates.

Wage control

Comments before the Senate Banking Committee on Tuesday had sent shares tumbling as Wall Street investors feared a rate increase would come sooner rather than later.

As he did on Tuesday, Mr Greenspan noted that deflation - a prolonged and widespread decline in prices - was no longer a concern as it was this time last year.

However, inflation has also largely remained under control, especially in the all-important area of wages, Mr Greenspan said.

He attributed this in large part to the long period of weak job creation the economy has endured.

Retail sales

Earlier in the day the dollar had risen against the euro and yen after his comments on Tuesday.

The dollar touched a five-month high against the euro and ticked higher against the yen.

They had earlier been pushed down to near record levels as the Mr Greenspan and his colleagues tried to pull the world's largest economy out of its recent slowdown.

Commenting on the economy before the Senate Banking Committee on Tuesday, the Fed chairman had said threats of deflation "are no longer an issue".

And he said the economy was picking up after a slow spell during the first quarter.

Mr Greenspan said strong retail sales, auto sales and durable goods orders, showed the economy was improving.

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