Greenspan raises hopes of soft landing

Wall Street gained ground last night with both shares and bonds posting strong gains after Alan Greenspan, the man charged with setting interest rates, hinted he was happier with the state of the economy.

Wall Street gained ground last night with both shares and bonds posting strong gains after Alan Greenspan, the man charged with setting interest rates, hinted he was happier with the state of the economy.

The chairman of the US Federal Reserve said a slowdown in consumer spending combined with continuing productivity growth might be sufficient to keep inflation under control.

But in his twice-yearly testimony to Congress he warned that the tight labour market and the threat of mounting energy costs might still stoke inflation.

The financial markets focused on a shift in tone from his last testimony six months ago. The Dow Jones blue-chip index jumped more than 1 per cent on the news while the price of Treasury bonds rose sharply.

In his prepared statement, Mr Greenspan said: "Demand may be moving closer into line with the rate of advance in the economy's potential given our continued impressive productivity growth. Should this favourable outcome prevail, the immediate threat to our prosperity from growing imbalances in our economy would abate."

But he also made it clear he did not believe the Fed had won its battle against the threat of inflation. "It is much too soon to conclude that these concerns are behind us," he said.

"We cannot be sure that the slower expansion of domestic final demand, at a pace more in line with potential supply, will persist.

"There is still concern about whether the current level of labour resource utilisation can be maintained without generating increases cost and price pressure."

He warned that rising energy prices resulting from increased demand were capable of having a major negative effect on the economy.

"I'm worried about the instability that [rising energy prices] creates within the economy and the difficulties that might emerge as a consequence of that," Mr Greenspan said in a question and answer session before the Senate banking committee.

Economists said the testimony had lessened the chance of another rate hike when the Fed's interest rate committee meets on 22 August.

Nick Stamenkovic, of IDEAglobal.com, said: "We would have to see some pretty poor inflation data and definite signs of the labour market tightening further for rates to rise."

The Fed last lifted rates in June when it ordered a half-point hike to 6.5 per cent, the highest level for almost a decade. Since then the data has been much weaker with a slowdown in retail sales, the housing market, payrolls numbers, and a rise in productivity to a seven-year high.

But the most recent inflation data saw a surge from 0.1 per cent in May to 0.6 per cent on the back of the recent surge in oil price.

However the core rate, which excludes energy and other volatile components, rose 0.2 per cent, in line with forecasts.