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Greenspan says US Economy Growing, Interest Rates Must Rise Eventually - 2004-04-21


The head of the Federal Reserve Board, Alan Greenspan, said that because the U.S. economy is expanding vigorously, higher interest rates may be required to control inflation.

In his second Congressional appearance in as many days, Mr. Greenspan said the short-term rate controlled by the central bank must rise, at some point, in order to forestall inflationary pressure. The overnight fed funds rate has been at a 47-year low of one percent. The last time the fed funds rate went up was July 2000, months before the onset of an economic slowdown.

Speaking at the same time as Mr. Greenspan, the new chief economist at the International Monetary Fund, Raghuram Rajan, said global stability would be well served by prompt Federal Reserve action raising the fed funds rate.

"My sense is, that at the very least, we should be preparing the way in the United States for higher interest rates," he said. "So that the markets are not surprised. As we see stronger numbers [on economic growth] come in, we are going to have to see those rates move up and I think certainly the time is now for preparing the markets for higher interest rates."

In his remarks to the Joint Economic Committee, the 78-year-old Mr. Greenspan refused to be pinned down on when rates would rise.

In an exchange with Senator Paul Sarbanes, he similarly refused to say how many times the fed funds rate might be increased.

"There is an implication [in your question] that once we start we continue [raising rates] for a protracted period," Mr. Greenspan said.

"Is that not the case," asked Sen. Sarbanes.

"That is not the case. There have been many occasions in which we made one move and stopped," replied Mr. Greenspan.

During the course of 2001, 2002, and 2003 the central bank cut rates a dozen times in an effort to stimulate business activity by lowering the cost of borrowing.

While it is not known when rates will rise, many experts anticipate a Federal Reserve rate increase as early as July. In what is considered an important shift, Mr. Greenspan said the danger of deflation (falling prices) has passed and that the risk now is of price increases.

The U.S. economy is projected by the International Monetary Fund to grow by more than 4.5 percent this year.

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