Greenspan vows to keep rates very low

In an attempt to reassure financial markets, US Federal Reserve chairman Mr Alan Greenspan vowed yesterday to keep interest rates very low for a long time, and even to make a further cut if necessary to boost the sluggish economy.

The Federal Reserve "stands prepared to maintain a highly accommodative stance of policy for as long as needed to promote satisfactory economic performance", Mr Greenspan told the House Financial Services Committee in Washington.

The Fed chairman said he detected signs that the US economy was finally ready to recover from a three-year period when businesses hesitated to invest or take on more workers.

US short-term interest rates, already at lows not seen since the 1950s, could even undergo a further "substantial" easing to combat deflation and boost growth if such action was warranted, Mr Greenspan said in prepared testimony.

This could happen as soon as the next meeting of the Federal Reserve Open Markets Committee on August 12th if the US economy is not showing convincing signs of a rebound.

The comments of the top US central banker have long-term implications for growth prospects in the Republic. The Irish economy relies on the US as its second-largest export market and its main source of inward investment.

In comments on the EU economy, Mr Greenspan noted that, "The rise in the exchange value of the euro over the past year has begun to hurt euro-area manufacturers."

EU exports have levelled off while imports have continued to rise, commented Mr Greenspan, while "recent indicators have shown little rebound in the pace of euro-area activity..".

Mr Greenspan said that in the first quarter, the US current account deficit amounted to $544 billion (€484 billion). Separately yesterday the Bush administration projected that this year's federal deficit will surge to a record $455 billion.

Democrats blame the soaring deficits on President Bush's tax cuts while Republicans say they have been caused by the slow economy, Iraq war costs and anti-terrorism measures. Next year's budget shortfall would hit $475 billion, the White House said.

Investors on Wall Street rejected Mr Greenspan's attempt to rally both equity and fixed income markets. Bonds sold off and yields moved to new two-month highs. Yields on the 10-year note rose back to 3.86 per cent, rates last seen on May 6th when the Fed warned about deflation while forecasting an economic rebound.

Mr Greenspan said yesterday that the Fed remained concerned about the possibility of deflation, though such an outcome remained a "pernicious, albeit remote, scenario".

Mr Greenspan cut the 2003 economic growth forecast by almost a percentage point to between 2.5 per cent and 2.75 per cent, when comparing the fourth quarter of 2003 to the fourth quarter of 2002. Growth was predicted to rise to 3.75-4.75 per cent in 2004.

Mr Greenspan blamed corporate scandals and the post-war uncertainty for the slow recovery.