MercoPress. South Atlantic News Agency

Fed and IMF anticipate higher US interest rates.

Federal Reserve chairman Alan Greenspan said the United States economy is in vigorous expansion and at some point may need higher interest rates to keep inflation at bay. US interest rates stand at a half century record low of 1%.

"As I have noted previously, the federal funds rate must rise at some point to prevent pressures on price inflation from eventually emerging", said Mr. Greenspan addressing this week the US Congress Joint Economic Committee on the state of the US economy.

However the Fed chairman was quick in watering down immediacy to his statement by stressing that, "As yet the protracted period of monetary accommodation has not fostered an environment in which broad based inflation pressures appear to be building". High rates of productivity growth and unused economic capacity are restraining upwards prices pressures and "should continue to do so for some time", added Mr. Greenspan who underlined that deflation, -a long decline of prices-, was no longer a concern as it had been a year ago.

According to Mr. Greenspan the long period of weak job creation in the US economy has helped to keep inflation under control. The US economy is now picking up after a slow spell during the first quarter, "with strong retail sales, auto sales and durable goods orders showing the situation is improving".

In its World Economic Outlook report the IMF also anticipates that the Federal Reserve must prepare the ground for when interest rates must rise, given the strong expansion of the US economy. According to the IMF the US economy is forecasted to expand 4,6% this year and 3,9% in 2005.

The report indicates that given the "brilliant outlook in the short term" and the need to prevent turbulences in financial markets both domestically and overseas the moment when the Fed will need to begin raising interest rates is getting closer.

However, even when the Fed must prepare the ground for higher rates, "inflationary pressures in the US economy are under control" and the "production gap" (unused capacity) is still considerable.