By Brian Fallow
WELLINGTON - Federal Reserve chairman Alan Greenspan will raise United States interest rates twice before the end of the year, says Joseph Carson, Deutsche Bank's New York-based chief fixed interest rate economist.
In addition to that 50 basis point tightening, he forecasts one further 25 point tightening next year.
The tightening is required to bring US growth back from current levels north of 4 per cent closer to the sustainable rate, around 3 per cent.
"Greenspan has been saying for years he only raises rates to make growth sustainable, not to end it. There isn't the inflation or any other imbalances which would require him to end this [growth] cycle," Mr Carson said, briefing institutional investors and money market participants yesterday.
A pick-up in growth in the rest of the world is already reflected in new orders for US manufacturers, and removes one of the allies Mr Greenspan has had over the past year or two in restraining inflation - weak commodity prices.
Deutsche Bank economists are forecasting growth of 3 per cent of better in most major regions of the world economy in 2000. Japan is the principal exception, but even there the forecast has been raised to 0.7 per cent.
Oil prices, which have doubled since the start of the year, are likely to go higher, Mr Carson expects, so tight are inventories.
Mr Carson said US growth was broader-based this year than last year when it was heavily concentrated in the technology sector, which is marked by falling prices.
The broader spread of growth this year, across 80 per cent of the economy, implied greater pricing pressures in the pipeline, which are showing up in the data.
Another international "head wind" which had helped contain US inflation - a strengthening US dollar - is dissipating. "I would not say the dollar is weak, but it has lost forward momentum," Mr Carson said.
Nor is fiscal policy any help to Mr Greenspan. After years of restraint it was becoming stimulatory.
"This year is the first year Federal Government spending has increased in real terms after eight consecutive years of decline."
But with massive budget surpluses projected in the new millennium - on very rosy economic assumptions, Mr Carson said - politicians were falling over themselves with plans to distribute them through increased spending or tax cuts or, most likely, both.
Deutsche Bank: Fed stays on rate tightening path
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