Fed Chairman Says Prospects Looking Brighter

Federal Reserve Chairman Alan Greenspan said Tuesday that America’s economic prospects were looking brighter, but cautioned that economic growth in the coming months will slow from the January-March pace.

“I suspect the American economy is in an upswing--it’s not going to be a dramatic upswing ... but events look increasingly positive,” Greenspan said during a panel discussion with other central bankers.

The U.S. economy, which suffered its first recession in a decade last year, rebounded at an annual rate of 5.6% in this year’s first quarter. But Greenspan, agreeing with the consensus of private forecasters, said that going forward, “We will not grow at the pace of the first quarter.”

Many private forecasters say the economy will turn in growth rates of 3% to 4% for the rest of the year. U.S. unemployment, currently at an eight-year high of 6%, is expected to peak around 6.5% later this summer before starting to decline.

The central bank, after pushing interest rates to a 40-year low of 1.75% last year to fight the recession and the shocks from the Sept. 11 terrorist attacks, has left rates unchanged this year.

Many analysts believe the Fed will remain on the sidelines until at least their August meeting, waiting for signs that the jobless rate has begun to fall.

The central bank has room to maneuver, because inflation outside of energy prices has remained moderate. Greenspan said businesses had very little power to raise prices because of the lingering effects from last year’s recession. But he cautioned that it would be a mistake for central bankers to let down their guard against the threat of inflation.

Greenspan said last year’s recession could be the shallowest of the last 50 years. The rebound this year would be “pedestrian” because the economy did not have to make up much lost ground.

He said the U.S. economy was able to bounce back so quickly from the recession and the terrorist attacks because of a “dramatic increase” in the use of information technology by companies, which allowed them to quickly adjust to changing circumstances.

Greenspan said a big swing in inventory investment by businesses was stimulating production dramatically, although he said there was a question over whether final demand will hold up. His comments came at the International Monetary Conference, an annual meeting between top officials of the world’s largest banks and central bankers.