Shaky few days should keep the markets steady, says Fed chief

US Federal Reserve Chairman Mr Alan Greenspan has said that recent turmoil in the stock market may be viewed as healthy in hindsight and should help keep the economy on a sustainable track.

Investors interpreted his remarks as all but ruling out a rise in interest rates when Fed policy-makers meet next month.

But Mr Greenspan left the door open for an eventual rise in rates since inflation is still a threat to the US economy.

In his first comments since a plunge in stock prices worldwide this week, the world's most powerful central banker told a committee in Congress that problems in Asia, which contributed to recent market turmoil, would put a damper on US growth by reducing exports to the region.

"Today's economy . . . has been drawing down unused labour resources at an unsustainable pace. The market's net retrenchment of recent days should help prolong our six-and-a-half-year business expansion," he told the congressional committee. Mr Greenspan also said inflation was low, even falling, but that the Fed could not be complacent about price pressures that may result from wages spurred higher by low unemployment.

"I think that the greatest threat to (the expansion) at the moment is the onset of inflation," Mr Greenspan told the panel in response to a question.

Investors in the inflation-sensitive bond market cheered, and the 30-year Treasury rose 7/8 of a point, or $8.75 on a $1,000 bond, lowering its yield, which moves in the opposite direction, to 6.23 per cent from 6.29 per cent Tuesday.

Mr Greenspan, who only three weeks ago warned that expecting stocks to move higher indefinitely was "unrealistic", insisted the stock market had been ripe for a correction as expectations of future earnings may have gotten out of line.

"Provided the decline in financial markets does not cumulate, it is quite conceivable that a few years hence we will look back at this episode . . . as a salutary event" for the economy, Mr Greenspan told the congressional committee.

Turning to the turmoil affecting the economies in south-east Asia, he said his main concern was how to halt the spread of such crises from one market to another.

"Particularly troublesome over the past several months has been the so-called contagion effect of weakness in one economy spreading to others as investors perceive, rightly or wrongly, similar vulnerabilities," he said. He commended the International Monetary Fund for providing help to troubled economies in the region.