While blaming an "infectious greed" in the business community for market setbacks, Federal Reserve chairman Mr Alan Greenspan told Congress yesterday that the US economy was on the road to full recovery.

But the Fed chairman, delivering his semi-annual report to the Senate Banking Committee, warned that "previously undiscovered misdeeds would no doubt continue to surface in the weeks ahead as chastened chief executives restate earnings".

Chief executives must be held accountable to report accurately on the financial condition of their companies and should be penalised for not doing so, he said.

"Falsification and fraud are highly destructive to free-market capitalism and, more broadly, to the underpinnings of our society," he said.

"The effects of the recent difficulties will linger for a bit longer but, as they wear off and absence of significant further adverse shocks, the US economy is poised to resume a pattern of sustainable growth," Mr Greenspan said.

The Fed chairman forecast the economy would grow between 3.5 per cent and 3.75 per cent when measured from the fourth quarter of 2001.

In February he said that growth would be in the 2.5 per cent to 3 per cent range. Productivity was rising at a remarkable pace.

The "depressing effects of recent events linger", he said.

One problem was that there was little pent-up demand to be satisfied in the economy, "consequently, a surge in household spending early in this recovery is unlikely".

Mr Greenspan indicated that there would be no rate increase "pending evidence that the forces inhibiting economic growth are dissipating enough to allow the strong fundamentals to show through more fully".

"Business spending has remained weak," he said. "Companies whose profits were lowered during the slowdown are reluctant to make big commitments in hiring and in investment until they were sure the recovery is here to stay."

He repeated his support for forcing companies to treat lucrative stock options for top executives as a business expense.

The danger that breakdowns in governance could at some point significantly erode business efficiency remained worrisome, he said, adding that the "market system depends critically on trust - trust in the word of our colleagues and trust in the word of those with whom we do business".

Continuing on the theme of corporate scandals, Mr Greenspan said that "the difficulties of judging earnings trends have been intensified by revelations of misleading accounting practices at some prominent businesses".

Since he last testified the economy had continued to expand, Mr Greenspan said.

"Although the uncertainties of earlier this year are as yet not fully resolved, the US economy appears to have withstood a set of blows - major declines in equity markets, a sharp retrenchment in investment spending and the tragic terrorist attacks of last September - that in previous business cycles almost surely would have induced a severe contraction.

"But while the economy has held up remarkably well, not surprisingly the depressing effects of recent events linger.

"Spending will continue to adjust for some time to the declines that have occurred in equity prices," he said.

"Nevertheless, the fundamentals are in place for a return to sustained healthy growth: imbalances in inventories and capital goods appear largely to have been worked off; inflation is quite low and is expected to remain so; and productivity growth has been remarkably strong."