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Greenspan says US economy stronger

The US economy is gaining momentum, while "additional revelations of corporate malfeasance" pose a threat to the recovery, Federal Reserve Chairman Alan Greenspan said.

"The fundamentals are in place for a return to sustained healthy growth," Greenspan said in the text of testimony to the Senate Banking Committee. At the same time, corporate accounting problems and resulting declines in US stock prices threaten to undermine consumer and business spending.

Tame inflation and concern that the recovery is fragile has led central bankers to refrain from increasing interest rates ``to allow the strong fundamentals to show through more fully,'' Greenspan said, suggesting policy makers are unlikely to raise rates any time soon.

The Fed's 11 reductions in the overnight bank lending rate last year to a four-decade low of 1.75 percent have helped consumers afford new homes and cars and to refinance existing mortgages, freeing up cash for other spending.

Company spending is expected to increase as profits and sales pick up and corporate borrowing costs remain low, Greenspan said.

Production of semiconductors and computers has already started to rise. Still, falling stock prices have made companies wary of making new investments.

"The effects of the recent difficulties will linger for a bit longer, but as they wear off, and absent significant further adverse shocks, the US economy is poised to resume a pattern of sustainable growth," Greenspan said.

The consensus of the Fed's policy-setting Open Market Committee is that the economy probably will grow 3.5 percent to 3.75 percent during 2002, faster than the 2.5 percent to 3 percent growth central bankers had forecast in February.

The Fed expects the personal consumption price index, an inflation measure tied to gross domestic product, to rise by a rate of 1.5 percent to 1.75 percent and the unemployment rate to end the year between 5.75 percent and 6 percent.

In their last forecast, released Feb. 27, Fed policy makers said they expected the personal consumption price index to rise by 1.5 percent in 2002.

Greenspan said the economy still faces the threat of terrorism.

Accounting scandals at Enron Corp and WorldCom Inc have contributed to falling stock prices.

So far this year, the Standard & Poor's 500 Index has lost about 20 percent, while the Dow Jones Industrial Average has dropped 14 percent. The NASDAQ Composite Index is down 29 percent.

"Perhaps the recent breakdown of protective barriers resulted from a once-in-a-generation frenzy of speculation is over," Greenspan said. "With profitable opportunities for malfeasance markedly diminished, far fewer questions are likely to be initiated in the immediate future."

The granting of corporate stock options surged during the 1990s and "perversely created incentives to artificially inflate reported earnings in order to keep stock prices high and rising," he said.

"There may be more forecasting of exchange rates, with less success, than almost any other economic variable," he said. Real interest rates, changes in productivity and current account deficits have not been "consistently useful in forecasting exchange rates even over substantial periods of one or two years," Greenspan said.
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