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Wednesday, 13 November, 2002, 16:17 GMT
Greenspan warns on economic 'soft spot'
Alan Greenspan and George W Bush
Does the chairman agree with the Bush tax cuts?
The head of the US central bank has warned that the US economy is still facing serious problems.

Alan Greenspan, the respected chairman of the Federal Reserve, told Congress that the prospect of a war against Iraq, and the falling stock market, had weakened confidence.

And he said that fallout from corporate scandals and the continued reluctance of business to make further investments were also contributing to the slowdown.

Last week, the Fed cut US interest rates sharply to a record low of 1.25%.

Mr Greenspan said he was hopeful that this action would help the economy overcome its current "soft spot" and return to strong growth.

No need for tax cuts

Mr Greenspan said that although the economy was stagnant, there was no evidence that it was accelerating on the downside.

He said that he was therefore unsure whether Congress should increase spending in order to stimulate the economy.

The Bush administration is considering accelerating its programme of tax cuts in order to provide more stimulus to help get the economy moving.

But Mr Greenspan warned that in contrast to monetary policy, it was not so easy to reverse tax cuts if inflationary pressures returned.

Strong productivity growth

Mr Greenspan said that in the long term, he was optimistic that the US economy was still strong.

This was partly based on the fact that productivity has continued to grow strongly, even during the downturn.

Productivity measures how much output each worker produces, and many economists believe that the increasing use of computers in the office has boosted US growth prospects considerably.

But there is debate on how the underlying growth rate of the economy has shifted upwards, from 2.5% to (as some argue) 4%.

Current account worries

Mr Greenspan said that he was worried that the growing US current account deficit was unsustainable.

He said that the huge deficit could not indefinitely be sustained and would have to be corrected.

But he said that demand from the rest of the world for investment opportunities in the US was continuing to prop up the dollar.

How to deal with the stock market

In earlier testimony, Mr Greenspan warned that it was hard for central banks to influence the course of the stock market.

Central banks cannot use interest rates to prevent an asset bubble, such as the late 1990s stock market rally, nor can they raise rates to puncture the balloon, according to Mr Greenspan.

Any attempts to intervene could damage the wider economy, he said.

"It was far from obvious that bubbles, even if identified early, could be pre-empted short of the central bank inducing a substantial contraction in economic activity, the very outcome we were seeking to avoid," Mr Greenspan said in a speech.

Asset bubbles are hard to identify until they burst, Mr Greenspan insisted, and he called for further investigation.

Mr Greenspan is sometimes referred to as the most powerful man in the world because of his control over the US economy.

Economic indicators

Fears and hopes

US Fed decisons

See also:

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