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Tue, Oct 21, 2003 - Page 12 News List

US interest rates likely to rise in next few months


Strong recovery of the US economy means that US interest rates are likely to rise in the next few months, the British newspaper The Times reported yesterday, quoting US Treasury Secretary John Snow.

And Snow also said that financial markets had mistakenly believed that the US wanted to see the dollar fall owing to misinterpretation of a remark he had made at the G7 summit of industrialized nations in Dubai a month ago.

The US had never intended to talk the dollar down, he told The Times.

Snow said that Washington would welcome an increase of interest rates because, far from being a dampener on the economy, it would underline the strength of growth prospects in the US.

Given the US economy's new-found strength, Snow said he would be "frustrated and concerned" if there were no upward movement in interest rates.

In the US, the central bank, the Federal Reserve, has independent responsibility for monetary policy.

Although Snow refrained from discussing monetary decisions, his comments implied that the Bush administration was preparing for much higher rates in the election year ahead.

This is in contrast with sentiment on Wall Street where many leading banks are still predicting that there will be no tightening of monetary policy until 2005, the newspaper said.

Snow said that economic growth in the year ahead would be about 4.0 percent and would "produce loads of jobs."

Referring to the rule of thumb that the US must generate 200,000 jobs a month to cut unemployment, he noted that growth of 4.0 percent would "translate into roughly 2 million new jobs from the third quarter of this year to the third quarter of 2004" or an average of about 200,000 a month, the report said.

He added: "I would stake my reputation on employment growth happening before Christmas. I'd bet dollars to doughnuts that we're going to see a pickup in jobs in the next few months."

Asked about the impact of such rapid growth on interest rates, Snow said: "Interest rates are the price of capital. As profits increase, there is going to be a need for a capital-rationing process."

"I'd be frustrated and concerned if there were not some upward movement [in rates]," he said.

Asked about the dollar, Snow said that US policy had been misunderstood by many commentators, although not by the markets themselves.

The dollar fell sharply in the month after a statement issued in Dubai by G7 ministers, which called for greater flexibility in exchange rates.

The US had never intended to talk the dollar down against other currencies, Snow said, observing that exchange rates were set by the market.

He said that misunderstanding had arisen over his use of the word "milestone" to describe a statement by finance ministers from the G7 which had referred to "greater flexibility" of exchange rates.

Snow said that the "milestone" was a commitment by all G7 countries to stimulate growth at home.

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