MercoPress. South Atlantic News Agency

Fed anticipates higher interest rates

United States Federal Reserve chairman Alan Greenspan said before Congress that interest rates are likely to keep rising given the US economy expectations of a solid growth.

However Mr. Greenspan warned about "significant uncertainties", basically three factors which pose risks to expansion, energy prices, rising labour costs and houses prices which could be affected by changes in long term interest rate expectations.

"Keeping growth sustained and inflation down will require the Fed to continue to remove monetary accommodation", said Mr. Greenspan on Wednesday to the Lower House Banking Committee.

US basic interest rates currently stand at 3,25%, after increasing from 1 to 3% in the last twelve months, and could be stabilizing at 4% by the end of 2005, estimate markets.

Greenspan said the US economy had weathered a soft patch in the second quarter when rising oil prices and a slowdown in business activity had triggered inflationary concerns.

But if wage pressures remain in check after being dormant for some months and oil prices remain below 61 US dollars per barrel, the Fed's growth predictions should not come under threat, added Mr. Greenspan.

Regarding fears of a housing bubble in the US market and a possible fallout for the economy the Fed chairman said that "the significant rise in purchases of homes for investment since 2001 seems to have charged some regional markets with speculative fever", particularly the trend towards less traditional mortgages such as interest free mortgages, which could leave homeowners "vulnerable should property prices drop".

Rock bottom interest rates have helped drive a boom in houses prices as homeowners re-mortgage their properties and increase borrowing to fund consumer spending.

But Mr. Greenspan cautioned that the Fed would continue "policy accommodation at a pace that is likely to be measured". Nevertheless the housing market so far has proved resistant to the Fed's higher rates policy.

Wall Street analysts indicate that a steady increase in personal incomes together with earnings in the stock market and real estate, anticipate a period of continued consumer expenditure growth in the US, with "the Fed raising interest rates to 4,25% by the second quarter of next year".

The European Union on the other hand following disheartening performance indexes showing a fragile economic growth situation in several country members, is expected to keep Euro zone interest rates unchanged at 2%, possibly for the next twelve months, and in Britain the Bank of England could decide a 25 points drop to 4,5% in its next meeting.