Greenspan damps down US rate cut expectations

US Federal Reserve chairman Alan Greenspan last night dampened speculation of a cut in American interest rates as he echoed Gordon Brown in talking up the prospects for the global economy in the aftermath of war in Iraq.

Mr Greenspan told a congressional hearing that conditions were in place for the world's largest economy to grow at a faster pace in the second half of 2003.

He pointed to improving consumer confidence and an upturn in factory orders. But in typical style, he added two caveats - concerns about the picture for unemployment and lingering worries about business investment.

"I continue to believe that the economy is positioned to expand at a noticeably better pace than it has during the past year, although the timing and the extent of that improvement remains uncertain," he said.

Long term growth potential for the economy "remains solid", he added, suggesting the Fed may adopt a wait and see approach instead of cutting rates at its next meeting.

In London, the chancellor, Gordon Brown, promised MPs on the cross-party Treasury select committee that the UK economy will bounce back now conflict in Iraq is over. "The oil price is coming down, and at the same time there is more optimism and less uncertainty," he said.

"There is a different perspective, I think."

The chancellor also rejected the claims of expert witnesses to the committee who questioned whether tax revenues will recover as strongly as Mr Brown hopes when the economy climbs out of its current downturn.

Dismissing the charge that the high tax take in the late 1990s was a one-off result of the stock market boom, he added: "You're making an assumption that the City cannot deliver; that financial company profitability cannot return."

The committee's concerns about burgeoning budget deficits were shared in Washington, where Alan Greenspan reiterated his reservations about President Bush's $726bn package of tax cuts, currently being debated on Capitol Hill.

Mr Greenspan caused a firestorm earlier this year by suggesting that ballooning budget deficits would ultimately cause interest rates to rise and undermine the stimulus provided by tax cuts.

"I haven't changed my view from where I was in February," he said yesterday. "I would be strongly supportive of certain types of tax cuts.

"But growing budget deficits led to the conclusion that we need to curb spending."