Greenspan: Rates must increase

Federal Reserve Chairman Alan Greenspan testified before the House Financial Services Committee Wednesday. Greenspan said the U.S. economy should enjoy sustained growth with low inflation in coming months.

He made clear in his final midyear economic report to lawmakers that the Federal Reserve Board would continue raising interest rates at the same gradual pace it has for the past year.

"Our baseline outlook for the U.S. economy is one of sustained economic growth and contained inflation pressures," Greenspan said in testimony before the House Financial Services Committee.

Greenspan listed three major threats to this economic outlook - the possibility that wage pressures, which have been dormant, will intensify; the threat posed by surging energy costs and the dangers posed to such sectors of the economy as housing if long-term interest rates rise significantly, says the AP.

According to Bloomberg, U.S. Treasuries fell after Greenspan said the U.S. economy is in a "sustained" expansion that will prompt the Fed to continue raising interest rates at a "measured" pace.

"The market is set up for good news on the economy and bad news for the bond market," Sharon Lee Stark, chief fixed- income strategist at Legg Mason Wood Walker Inc. in Baltimore was quoted as saying by Bloomberg before Greenspan's testimony began.