Greenspan sees signs of slowdown

Alan Greenspan's words can move markets

Alan Greenspan, head of the US central bank, the Federal Reserve, has told Congress that he is still watching the US economy vigilantly for signs of inflation.

But he says that "for the time being" consumer spending appears to be slowing down, as the effect of higher interest rates has slowed the housing market and reduced spending on expensive household purchases.

It is clear that, for the time being at least, the increase in spending on consumer goods and houses has come down several notches

Alan Greenspan, US Federal Reserve

He also said that the continuing gains in US productivity may have helped to keep wages in line, and limited inflationary pressures.

He predicted that the economic expansion would continue for at least another 18 months, but at a reduced rate, while the Fed faced a series of "complex challenges" in order to ensure a soft landing.

Mr Greenspan said there were pressures that were helping to cool the economy, including the flattening of equity prices this year, and the rise in oil prices, which amounted to a $75bn tax on consumers.

US stock markets rose strongly after Mr Greenspan's testimony, with the Dow Jones average of leading industrial stocks up 1.4%, and the tech-heavy Nasdaq index nearly up 3% by the time he finished speaking.

"It's just a barely balanced testimony with a lot of weight on the side that suggests the Fed does not need to tighten any further," said Pierre Ellis, senior economist at Primark Decision Economics. "The statement is amazingly (market) friendly."

Warning on imports

Mr Greenspan warned that the economy was still growing too fast, with demand exceeding the capacity of the economy to supply goods by around 1.5% to 2% each year.

Fed Forecasts for US economy

Growth (2000): 4%-4.5%

Growth (2001): 3.25%-3.75%

Inflation(2000): 2.5%-2.75%

Inflation (2001): 2%-2.5%

The gap was being filled by imports of goods, leading to a record trade deficit, the immigration of workers and the flow of capital from abroad.

Although he repeated his familiar warning that "the excess of growth of domestic demand over potential supply must be closed before the resulting strains and imbalances undermine the economic expansion," Mr Greenspan sounded more optimistic than in previous testimony.

He added that "aggregate demand may be moving closer in line with the rate of advance in the economy's potential, given our continued impressive productivity growth."

The Fed is forecasting the US economy to grow by around 4.25% this year, and 3.5% in 2001, a significant slowdown compared to a growth rate of 5.6% in the first quarter of the year.

Mr Greenspan warned that there were limits to how many more workers could be found before labour costs began to soar and how much more the US could borrow from abroad.

But he said that "on balance" the historically low US unemployment rate of 4% did not necessarily poise a danger to inflation.

And he praised the growing US budget surplus for helping to ease the strain on the balance of payments, by boosting the pool of private capital and keeping interest rates low.

Next decision in August

Mr Greenspan was speaking to the Senate Banking Committee as part of his twice-yearly report on the economy.

The last decade has been a remarkable period of expansion for our economy

Alan Greenspan, US Federal Reserve

The Fed will meet again on 22 August to decide on interest rates.

In the past year the Fed has raised rates aggressively, most recently in May when they went up by 0.5% to 6.5%. But Mr Greenspan's remarks to Congress suggest that there may now be a prolonged pause before further rate hikes.

Mr Greenspan pointed out that the Fed had kept rates unusually low early in the expansion because of the fragility of the financial sector, before raising them to relatively high levels to deal with the effects of accelerating growth. .

US core inflation was a benign 0.2% in June despite an eight-year economic expansion, and the Fed said that so far consumers did not believe that the spurt in energy prices would lead to a long-term increase in inflation.