Greenspan says rates likely to go higher

to combat inflation and keep economic growth on track.

Fed chief Alan Greenspan, one of the most influential economic

policy-makers in the United States, emphasised that although prices are

under control, the central bank had to stamp out inflationary

expectations simmering in the economy.

He made the comments just three weeks after the Fed, as the central

bank is known, notched up short-term interest rates -- its first move to

tighten credit in five years -- in what amounted to a pre-emptive strike

against inflation.

''To promote sustainable growth, history suggests that real short-term

rates are more likely to have to rise than fall from here,'' he told the

House Banking Committee in his semi-annual testimony before Congress.

Higher interest rates are used as a weapon to combat inflation by

slowing the economy, while low interest rates make loans cheaper and

tend to increase economic activity, but can also put upward pressure on

prices and wages.

Mr Greenspan emphasised that the Fed must act before inflation shows

up because it becomes very difficult to control once under way.

''When it comes to inflationary expectations, the nearer to zero the

better,'' Mr Greenspan told the committee.

He also said that although some slowing of the economy is expected

from a modest rise in interest rates, overall the economy continues to

expand.

''Nonetheless, as best as we can judge, the economy's forward momentum

remains intact,'' Mr Greenspan said.

His testimony was being watched even more closely than usual because

of the central bank's move on February 4 to increase short-term rates a

quarter- percentage point, to 3.25%.

The move surprised some economists and US financial markets because

there had been scant evidence of inflationary pressure in the economy.

And long-term rates have jumped since -- a sign that the markets remain

nervous about inflation.

The stock and bond markets showed little immediate reaction to Mr

Greenspan's remarks, which were in line with expectations.

The Fed's actions ripple throughout the economy, affecting interest

rates on everything from short-term consumer loans to 30-year mortgages.

In discussing the current picture, the Fed chief said it was ''too

early'' to judge the degree of underlying economic strength in the early

months of 1994.

Mr Greenspan said the earthquake in Southern California and severe

winter weather ''may have dulled'' consumer spending in January and

February. He said ancedotal evidence indicated underlying strength in

new orders and production, while the labour markets are weaker.

He said he expected gross domestic product -- the total output of the

US economy -- to rise between 3.0% to 3.25% this year. The American

economy grew by 2.9% in 1993.

The consumer price index -- a widely watched measure of inflation --

is expected to rise about 3%, compared with a 2.7% increase last year.

And unemployment, the Fed said, was expected to be 6.50% to 6.75% in

the fourth quarter. It was 6.8% for all of 1993 under the government's

old method of calculating the rate. The new method, which started in

January, tends to increase the unemployment rate, making comparisons

difficult. -- Reuter