IRONING OUT THE IMBALANCES

Alan Greenspan, chairman of the US Federal Reserve, was characteristically even-handed in his semi-annual Humphrey-Hawkins testimony before the House Banking Committee. But the message was very clear. In spite of extremely impressive productivity growth and the spread of new technology, the economy is in danger of overheating. Domestic demand needs to cool - and this means higher interest rates. While basking in the good news of a record-breaking expansion, Mr Greenspan got to the point. Aggregate demand growth has outpaced aggregate supply. Underlying improvements in the economy have helped keep inflation under control. So have two principle safety valves: drawing down the labour pool and a growing current account deficit. But domestic demand cannot continue to grow faster than supply indefinitely, before sparking inflation.