US economic recovery will be moderate, says Greenspan

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The chairman of the US Federal Reserve, Alan Greenspan, yesterday expressed confidence that America's faltering economy had turned the corner but warned that the recovery would be moderate. Analysts took his comments as an indication that interest rates would remain unchanged for some time.

"Despite the disruptions engendered by the terrorist attacks of 11 September, the typical dynamics of the business cycle have re-emerged and are prompting a firming in economic activity," said Mr Greenspan, as he delivered the central bank's semi-annual monetary policy report to Congress. "An array of influences unique to this business cycle, however, seems likely to moderate the speed of the anticipated recovery."

Mr Greenspan said one key sign that the economy was "close to turning point" could be found in the behaviour of inventories that now were so lean that companies will be forced to step up production in the coming months. Stocks extended their gains yesterday morning after the chairman's comments.

Mr Greenspan said that unlike past recoveries, when pent-up consumer demand powered a strong rebound in growth, this time spending had remained surprisingly strong even in the downturn. "As a consequence, although household spending should continue to trend up, the potential for significant acceleration in activity in this sector is likely to be more limited than in past cycles," he added.

Economists said the emphasis on the likelihood that the recovery would be modest indicated the Fed would refrain from raising interest rates from four-decade lows for several months. "The Fed will probably hold rates steady at a low level as long as they can. And I think as long as the unemployment rate is rising, they'll maintain a policy bias toward weakness," said Gary Thayer, the chief economist at AG Edwards & Sons in St Louis.

Mr Greenspan also weighed in on the controversy surrounding Enron, saying the energy group's failure was an example of a risk stemming from companies that have "conceptual" rather than physical assets. Although he had previously said he did not see Enron as a specific threat to the recovery, Mr Greenspan said at some point in the future such companies may raise unique issues for the economy.