'Energy prices may stymie US recovery'

Despite a spate of recent good news, the current "significant" US economic recovery was not yet set in stone, and a long-term rise in energy prices could have "far reaching consequences", Alan Greenspan, the chairman of the US Federal Reserve Board, warned yesterday.

In a keenly awaited testimony to the Joint Economic Committee of Congress, Mr Greenspan praised the resilience of the economy in the face of major "adverse shocks", above all the 11 September terrorist attacks. "But the strength of the economic expansion that is under way remains to be clarified," he said.

Before the chairman spoke, new evidence emerged of a recovery, with a 0.8 per cent jump in industrial production in March, and a surge in the trade deficit for February to $31.5bn (£21.9bn), suggesting that a reviving economy is importing more goods from the rest of the world.

Mr Greenspan's cautious tone suggests that he may wait until the autumn before raising interest rates after 11 successive cuts that have brought the key federal funds rate to a 40-year low of 1.75 per cent.

The Fed chairman said that a limited increase in the cost of energy would have a small impact on the economy. But a large and sustained rise, feared by some analysts, could have "far reaching consequence".

In other remarks suggesting there will be no abrupt reversal in the direction of interest rates, Mr Greenspan also played down fears that a rebounding economy could set off a new surge in inflation.

The key, he argued, was the strong growth in productivity since the mid-1990s. In the short term this might slow the creation of new jobs; in the longer run, however, rising productivity would allow the jobless rate, now at 5.7 per cent, "to be driven down quite significantly without any inflationary implications".

"The results are far more impressive than we would have expected," Mr Greenspan said.