Fed chief upbeat overall

By Phil Couvrette
Associated Press

MONTREAL — U.S. Federal Reserve Chairman Alan Greenspan said yesterday that America's economic prospects are looking brighter, but he cautioned that economic growth in the coming months will not keep up with the January-to-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," the Fed chief said in response to questions 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 percent in this year's first quarter.

Greenspan, agreeing with the consensus of private forecasters, said that in going forward, the U.S. economy "will not grow at the pace of the first quarter."

Many private forecasters say the economy's growth rate will be between 3 percent and 4 percent for the rest of the year. U.S. unemployment, at an eight-year high of 6 percent, is expected to peak around 6.5 percent later this summer before starting to decline.

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

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

The central bank has room to maneuver, because so far inflation outside of energy prices has remained moderate. In his remarks yesterday, Greenspan said businesses still 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, the first in the United States since 1990-91, would turn out to be the shallowest of the past 50 years. For that reason, the rebound this year would be "pedestrian," he said, 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.

He also credited the growing use of derivatives — financial instruments linked to the underlying value of a certain asset such as stocks or commodities. He said companies used derivatives to spread their risks.

These factors had allowed for a quick rebound from events such as the terrorist attacks that "would have upended the economy" in years past, Greenspan said.

His comments came at the International Monetary Conference, an annual event in which top officials at the world's largest banks meet with central bankers to discuss problems facing the international financial system.