Fed chief hints any interest rate rise will be small

Alan Greenspan, the Federal Reserve Board chairman, yesterday tried to calm anxious US financial markets by implying that if the central bank does, as expected, raise short-term interest rates next week, any increase will be modest.

In keenly awaited testimony to the Senate Finance Committee, Mr Greenspan also voiced concern about the swelling budget deficit that may be brought about by the tax cut bidding war under way between President Bill Clinton and the new Republican Congress.

History, he warned, "is replete with examples of fiscal pressures leading to monetary excesses and then to greater inflation".

It was crucial, Mr Greenspan added, that the US continue to keep inflation in check. Although there were "some reasons for concern, at least with regard to the nearer term", prospects for achieving this were "fundamentally good".

This typically sybilline, central bankerly language does nothing to reduce the likelihood that the policy-setting Federal Open Market Committee will raise rates at its meeting next Tuesday, for what would be the seventh time in a year. But Mr Greenspan'swords seemed to indicate that any increase in the Fed funds rate from the current 5.5 per cent would probably not exceed half a percentage point.

That anyway was the reaction on Wall Street, where after an early drop the Dow Jones industrial was up over 26 points by 2pm and bonds also moved higher. In recent days financial markets have been worried by a string of indicators suggesting that last year's string of interest rate increases have not dampened the expansion.

Eddie George, Governor of the Bank of England, delivered a similar assurance of modest rate rises to businessmen last night. Interest rates in Britain are likely to follow US rates up after Mr George and the Chancellor of the Exchequer meet next Thursday.

Mr George said: "Sustainable growth can be achieved only in a stable environment where you can invest with confidence that the economic policy brakes will not be slammed on to bring it all to a juddering halt." It was a repetition of his view that interest rates will not have to rise as far in this business cycle as in previous ones.

Even so, financial markets consider a rise in base rates next week or the week after a near certainty because of a series of economic figures showing strong growth and inflationary pressure. The latest of these was the Confederation of British Industry'squarterly industrial trends survey, published on Tuesday.

The CBI is to write to tell the Chancellor that the inflation pressures shown by its survey are not enough to justify an interest rate rise.

The employers will also play down the strength of the inflationary indications in their latest data. Their letter is timed to arrive ahead of next Thursday's monetary policy meeting.

Howard Davies, director-general of the CBI, said the letter would point out that although the increased expectations of price rises shown in the survey were significant, they were no greater than appeared in the survey 12 months ago.

Mr Davies said: "We think it is not as strong an indicator as you might think on the bald figures."