US economy picking up steam, says Greenspan

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Alan Greenspan said the US economy appeared to have picked up steam again this summer after an earlier slowdown. His remarks increased the already strong likelihood the Federal Reserve would raise key short-term rates when policymakers meet this month.

Alan Greenspan said the US economy appeared to have picked up steam again this summer after an earlier slowdown. His remarks increased the already strong likelihood the Federal Reserve would raise key short-term rates when policymakers meet this month.

In testimony on Capitol Hill yesterday, the Fed chairman declared that recent data suggested the recovery "has regained some traction", after hitting a soft patch in the second quarter - almost certainly because of the increase in energy prices. Two key indicators, covering consumer spending and housing construction, had risen in July after performing poorly in the previous month, he noted.

The improvement also seems to be showing up in the employment market, after the government reported last week that the economy created 144,000 new jobs in August, after an anaemic 32,000 increase the month before. Mr Greenspan made clear to the House Budget Committee he expected economic growth to quicken to somewhere close to the 4.5 per cent annual rate forecast by the central bank.

However his more important subtext - unspoken as usual - was that the Fed would almost certainly press ahead with its stated policy of nudging the benchmark federal funds rate higher, when the policy-setting Federal Open Market Committee meets on 21 September.

Since June the central bank has raised the fed funds rate twice, from a 45-year low of 1 per cent to 1.5 per cent. Some analysts had believed the slowdown might deter the FOMC from acting again, especially so close to a presidential election. But markets were all but sure that another 25 basis point increase is on the way this month.

Indeed, a decision to hold rates at current levels would probably be counterproductive, with markets taking it as a sign that the Fed had lost confidence in the vigour of the recovery. Many analysts believe that even a fed funds rate of 1.75 per cent is well below the "neutral" monetary stance aimed at by the Fed, implying a rate of 3 per cent or more.

Mr Greenspan also warned about the deepening US fiscal imbalance, after a forecast by the Congressional Budget Office that the federal deficit would hit $422bn this year, and that the cumulative shortfall for the next decade would top $2 trillion.

The Fed chairman saidsustained budget deficits of this size would push inflation higher. He also sounded the alarm about the pressure building on the welfare system as baby-boomers retire.

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