Federal Reserve chairman Alan Greenspan said on Tuesday he was ready to keep US interest rates low for a long time, even as he predicted a hearty economic recovery.
In unusually blunt testimony to Congress, the Fed chairman left the door open to further cuts in official borrowing costs, which already stand at a 45-year low of 1 percent.
But he gave no indication the central bank was poised to trim rates at its next meeting on Aug. 12. He also played down the prospect that the Fed would use unconventional measures such as buying US Treasury bonds as a means off warding off deflation.
Greenspan said the economy "could very well be embarking on a period of extended growth."
Speaking to the US House of Representatives Financial Services Committee in his twice-yearly monetary testimony, Greenspan said the central bank "stands prepared to maintain a highly accommodative stance of policy for as long as needed to promote satisfactory economic performance."
"We would seek significant improvement in the performance from what we currently see before [a rate increase] is even on the table," he said.
Many analysts were struck by the optimism of the economic forecasts published in the Fed's official report to Congress.
Policymakers predicted that the economy would show an expansion rate of 2.5 percent to 2.75 percent from the fourth quarter of last year to the fourth quarter of this year.
Given that the economy has grown at minuscule rates so far this year, the figures imply a sharp rebound in the second half.
"The Fed's forecast for the second half has to be close to 4 percent," said Roger Kubarych, economic adviser to Hypo-Vereins Bank.
The Fed pegged growth next year at 3.75 percent to 4.75 percent.
"We believe that we're at a turning point, and our best judgment is that things will be improving," Greenspan said.
The Fed chief weighed in on the politically charged issue of US President George W. Bush's US$350 billion tax cut package. He said he thought the reductions would help the recovery but he repeated his admonition that lawmakers and the administration must remain mindful of large and growing budget deficits.
The White House on Tuesday unveiled a mid-year budget forecast that suggested the federal budget deficit would balloon to a record US$455 billion this fiscal year after absorbing heavy costs from the war in Iraq.
On the subject of monetary policy, Greenspan did not specify how long he would be prepared to keep borrowing costs at their current cheap levels, but econ-omists speculated it could be well into next year or even 2005 before the central bank begins raising rates.
"I think what Greenspan is trying to suggest is that it may be a year or so before they raise rates and we shouldn't think about that at the moment," said Christopher Low, chief economist at FTN Financial in New York.
The Fed's most recent rate cut, on June 25, marked the 13th reduction since early 2001.
Greenspan said one reason the Fed has undertaken such an aggressive rate-reduction campaign is that it is worried that the very low inflation rate could give way to an outright fall in prices.
"Indeed, there is an especially pernicious, albeit remote, scenario in which inflation turns negative against a backdrop of weak aggregate demand, engendering a corrosive deflationary spiral," Greenspan said.