Greenspan's upbeat comments may signal US rates rise

Federal Reserve chairman Alan Greenspan appeared to clear the path for another rise in US interest rates yesterday when he delivered a moderately upbeat assessment of the country's economy which has slowed in recent months because of high oil prices.

Testifying before the House of Representatives Budget Committee, Greenspan said: "The most recent data suggest that, on the whole, the expansion has regained some traction. We still have problems ... but I think I agree with you in general that the economy is doing reasonably well."

Greenspan's remarks are likely to be seized upon by President George Bush as proof that the economy, which threatens to be his weak point in the run-up to the presidential election on November 2, has turned the corner. Democratic challenger John Kerry repeatedly talks of the job losses and economic weakness under Bush since 2001.

Economists and financial markets had billed Greenspan's testimony as key to whether the Fed would decide that the economy's recent "soft patch", as Greenspan has dubbed it, would mean it could hold off raising its Fed Funds rate from 1.5% when it meets on September 21.

The Fed has raised rates twice in the past three months from a 46-year low of just 1%. Analysts are expecting the central bank to raise them to 1.75% in two weeks' time and that they will keep gradually rising after that.

Greenspan said factors like consumer spending and housebuilding had picked up after a slowdown in the spring and early summer.

The 78-year Fed chief also appeared fairly relaxed about the impact of record highs in oil prices which have been blamed for slowing economy activity. The economy grew 2.8% on an annualised basis in the second quarter of this year, sharply down from 4.5% in the January to March period.

Oil prices hit a record $49.40 a barrel last month but have since dropped back to the low $40s.

"Despite the rise in oil prices through mid-August, inflation and inflation expectations have eased in recent months," Greenspan said, although he added it was extremely difficult to say what impact high oil prices were having on the economy.

On the issue of the government's swelling budget deficit, Greenspan warned of the importance of a balanced budget in the long term. He appeared to offer implicit backing to Mr Bush's tax cuts, however.

"If we cut taxes, we will, other things equal, increase economic growth. I ... would much prefer to have both lower taxes and lower spending, but of necessity a balanced budget.

"Others may choose higher taxes and higher spending. I think that would make the level of economic activity less, but that's a debatable point."