Interest rates must rise, says Fed chief

Federal Reserve chairman Alan Greenspan yesterday moved to prepare the ground for a rise in US interest rates from their half-century low of 1% as soon as this summer.

His words came as the International Monetary Fund predicted that the world economy would enjoy its best performance in four years this year, although that would mean higher interest rates almost everywhere.

Mr Greenspan, in testimony to a congressional committee in Washington, said: "As I have noted previously, the federal funds rate must rise at some point to prevent pressures on price inflation from eventually emerging."

He was ambiguous about when the rate rise would come but stressed that when it did it would not necessarily be the first of many, as the world's financial markets had assumed.

"There's an implication ... that once we start we continue for a protracted period. That is not the case. There have been many occasions on which we've made one move and stopped."

He also said that, in spite of strong growth and low interest rates, there were as yet few signs of inflation emerging in the world's largest economy.

He was upbeat about the economy in general, noting that the jobs market and business investment were picking up.

Until recently many analysts worried that the rapid US recovery was "jobless" and driven only by President Bush's tax cuts and strong consumer spending.

But non-farm payrolls data earlier this month showed the economy created 308,000 jobs in March, the best showing in four years.

Mr Greenspan's remarks were underlined by a clutch of strong first-quarter results from some of corporate America's biggest names, including JP Morgan Chase, Ford, Eastman Kodak, American Airlines and Motorola.

The Fed chief's hint on rates was applauded by IMF chief economist Raghuram Rajan.

"Eventually those rates will have to go up. So the time is now for preparing markets for higher interest rates," he said.

In its twice-yearly report on the world economy, the IMF raised its growth forecast for this year to 4.6% and to 4.4% for 2005.

For the US it pencilled in growth of 4.6% this year, up from 3.1% in 2003.

British growth was forecast at a respectable 3.5% this year but the IMF's punchiest forecasts were for China and India, at 8.5% and 6.8% respectively.

By contrast, the global lender noted that recovery was least well established in the eurozone, which was forecast to grow a paltry 1.7% this year after three years of stagnation.

"With global trade rising sharply, financial markets buoyant and the US economy rebounding, the balance of risks has improved considerably," the report said.