US points to higher interest rates

INTEREST rates are set to go up in the US later this year, the Federal Reserve Bank of Dallas confirmed late last night.

But how much it rises depends on a number of assumptions about overcapacity in the economy.

The financial markets on Wall Street have been betting that the Fed will start raising rates from a 45-year-low of 1% next month. Fed fund futures contracts actually indicate rates at 4% by the end of next year, but the Dallas Fed says that caution ought to be the watchword for policymakers.

'Short-term interest rates will have to rise substantially at some point... the question isn't whether interest rates are going to rise but how soon they'll rise and how fast they'll go once they start,' it said.

The comments come just weeks after Federal Reserve chairman Alan Greenspan said the US economy was in a state of vigorous expansion and may need higher interest rates to keep inflation at bay.

Earlier this week, President George W Bush officially renominated 78-year-old Greenspan to serve another four years at the head of the Federal Reserve.

Greenspan 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.

His comments have been echoed by other Fed officials in recent days.

Federal governor Ben Bernanke said last week that generally the Fed adjusted interest rates incrementally, in a series of small or moderate steps in the same directoion.

'An alternative to gradual policy adjustment is what an engineer might call a bang-bang solution, or what I will refer to today as the 'cold turkey' approach.

'Economic developments over the next year are reasonably likely to be consistent with a gradual adjustment of policy,' he added.

Minneapolis Federal Reserve president Gary Stern confirmed the widespread view among US banking officials that rates are set to move.

'As I look at the futures market there's a widely anticipated move in interest rates coming, and I think that is appropriate at this stage,' he said.

'It's not in my mind a question of stemming the growth rate, but making sure that the growth can be sustained for an extended period of time.'