Fed seeking to keep dollar at present rates

THE US Federal Reserve wants to keep the dollar at present rates as the White House pushes to keep it down.

US interest rates are still “fairly low” after six straight increases, Federal Reserve chairman Alan Greenspan said yesterday, warning that, despite the economy’s good health, fiscal discipline is vital. Financial markets took Mr Greenspan’s hotly awaited testimony to the Senate Banking Committee as confirmation that more interest-rate hikes lie ahead in a cycle that began in June, as well as a vote of confidence in the expansion.

IIB Bank chief economist Austin Hughes, after Mr Greenspan’s testimony, said the Fed chairman suggested further dollar losses could fuel higher inflation in the US. “So, the Fed, unlike the White House, is not seeking to push the dollar lower. “In addition, Greenspan again sounded reasonably relaxed about the outlook for the US external deficit. Today’s remarks were similar, if a little more restrained, than those made in his recent speech which sparked sharp dollar gains. We feel the testimony should offer support to the dollar both through Green-span’s specific currency comments and the promise of higher US interest rates.”

Mr Greenspan’s text did not mention the Fed’s policy pledge to continue raising interest rates at a ‘measured’ pace. Adjusted for inflation, the 2.5% federal funds rate ‘by most measures’ remains ‘fairly low’, the chairman said.

The 78-year-old central banker, whose term at the Fed expires next year, said the economy may grow as fast as 4% this year while a key inflation measure rises less than predicted in July. He said it is “imperative” that the government restore fiscal restraint to prepare for an aging workforce and the rising burden of retirees on Social Security and Medicare.

Mr Hughes said Green-span’s testimony was a touch more interest rate unfriendly than markets had expected, but he feels the Fed has been sufficiently vague to allow a less threatening interpretation become established over time.

He believes US interest rates will continue to rise.

Additional reporting Reuters and Bloomberg.