By Jeannine Aversa
The Associated Press
WASHINGTON - Federal Reserve chairman Alan Greenspan says the limping economy should gradually grow stronger with the end of the Iraq war, but he's leaving the door open for lower interest rates if that doesn't happen.
Greenspan offered the House Financial Services Committee Wednesday his first detailed thoughts on the economic recovery since February, when the economy was feeling the strain of prewar jitters.
"I continue to believe the economy is positioned to expand at a noticeably better pace than it has during the past year, though the timing and the extent of that improvement remains uncertain," Greenspan told the lawmakers.
The economy grew at a tepid rate of 1.6 percent in the first three months of 2003. Nevertheless, economists were heartened that it didn't contract under the weight of war uncertainties, higher energy prices and sinking consumer confidence.
Greenspan noted that many private economists are hopeful a rebound in economic activity will develop in the second half of this year. "Certainly a number of elements should be working in that direction," he added.
A recent rebound in stock prices and a retreat in oil prices are welcome developments for businesses and consumers, who are the main force keeping the economy going, Greenspan said.
While the postwar climate boosted consumers' confidence in the economy in April, businesses are still wary of making big commitments in capital spending or in hiring, major forces restraining economic growth.
"Going forward, some further unwinding of the economic tensions that have been associated with the situation in Iraq seems likely," Greenspan said. "As that occurs, the fundamental trends shaping the economic outlook should emerge more clearly."
Given Greenspan's cautiously optimistic tone, economists think that Fed policy-makers will continue to hold the federal funds rate, the Fed's main lever for influencing the economy, at a 41-year low of 1.25 percent when they meet Tuesday. The Fed last cut this rate Nov. 6.
However, in the event the economy doesn't heal fully on its own in the months ahead and requires a tonic, the Fed is prepared to lower interest rates, Greenspan said.
"We still have room in monetary policy if we choose to move," the Fed chief said.
Greenspan also repeated his opposition - first revealed in February - to massive tax cuts that would enlarge the federal budget deficit, which is estimated to balloon to record amounts this year and next. He said any further tax cuts need to be offset either with cuts in spending or tax increases in other areas to keep the deficit from soaring.
The House wants $550 billion in tax cuts over 10 years, while the Senate wants to limit such a package to $350 billion.
Greenspan also said Fed policy-makers were on guard to lower interest rates to prevent deflation - a prolonged bout of falling prices - should that become necessary.
"With price inflation already at a low level, substantial further disinflation would be an unwelcome development, especially to the extent it put pressure on profit margins and impeded the revival of business spending," he said.
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