The Telegraph
Since 1st March, 1999
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Fed chief cautiously upbeat on economy

New York, Dec. 20 (Reuters): The US economy is still working through a soft patch but growth should accelerate next year if global tensions ease and corporate profits improve, Federal Reserve chairman Alan Greenspan said on Thursday.

Speaking to the Economic Club of New York, the Fed chief said there was no reason to fear the United States was at risk of price deflation as he delivered a cautiously upbeat assessment of future prospects.

Without mentioning Iraq, Greenspan said geopolitical risks had risen sharply and put a damper on demand, but “any significant fall in the current geopolitical and other risks should noticeably improve capital outlays, the indispensable spur to a path of increased economic growth”.

He said there was scant chance of the United States falling into a deflationary spiral.

“The US is nowhere close to sliding into a pernicious deflation,” Greenspan said.

If a widespread decline in assets and other prices did develop, the US Fed chief said policymakers had ample tools to fight it.

“If deflation were to develop, options for an aggressive monetary policy response are available,” Greenspan said.

Some economists have expressed concern the US could fall into a deflation cycle like the one that has bedeviled Japan’s economy in recent years.

Low rates a tonic

Greenspan said since US central bank policymakers cut interest rates by a half percentage point on November 6 to a four-decade low of 1.25 per cent for the federal funds rate, there have been signs the economy was getting past a bout of weakness.

“The limited evidence since the November easing has supported our view that the US economy has been working its way through a soft patch,” Greenspan said, helped by cheap credit. “More broadly, strong growth of labor productivity, supplemented by reduced tax payments, has provided a boost both to incomes and to spending.”

Greenspan conceded the downturn was extensive—“the patch has certainly been soft”—with job markets still “subdued” and stronger business investment stalled until profits fatten. Still, Greenspan said, low interest rates and rising rates of productivity were helping support economic activity.

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