BEN Bernanke, who succeeded the near-legendary Alan Greenspan as chairman of the US Federal Reserve on January 31, struck a hawkish tone on interest rates in his first bi-annual "Humphrey Hawkins" testimony to Congress yesterday.

He also expressed "concern" about the US budget deficit and called for action "soon" to address the rising social security, Medicare and Medicaid payments which would stem from demographic changes in the world's largest economy.

Elaborating on the statement issued after Greenspan's last Federal Open Market Committee meeting last month, at which the benchmark Fed funds rate was raised by a quarter-point to 4.5percent, Bernanke told the House of Representatives' financial services committee: "Gauging the economy's sustainable potential is difficult, and the Federal Reserve will keep a close eye on all the relevant evidence and be flexible in making those judgments.

"Nevertheless, the risk exists that, with aggregate demand exhibiting considerable momentum, output could overshoot its sustainable path, leading ultimately, in the absence of countervailing monetary policy action, to further upward pressure on inflation.

"In these circumstances, the FOMC judged that some further firming of monetary policy may be necessary, an assessment with which I concur."

These remarks will dent any lingering hopes that the peak of the US interest rate cycle has been reached.

Bernanke appeared tactful on budget deficits.

He said: "For the most part, the financial situation of state and local governments has improved noticeably over the past couple of years.

"Rising personal and business incomes have buoyed tax revenues, affording some scope for increases in state and local government expenditures. At the federal level, the budget deficit narrowed appreciably in fiscal 2005."

However, questioned on deficits, he said: "I am concerned about the prospective path of deficits.

"I believe it does reduce national savings and therefore it imperils to some extent the prosperity, the future prosperity of our country, and increases the burden that will be faced by our children and grandchildren."

He said demographic changes were of "particular concern" and warned implications of rising social security and healthcare payment obligations were "quite draconian in the long run".