Greenspan-U.S. economy risks unexpected weakness

Greenspan-U.S. economy risks unexpected weakness

Federal Reserve Chairman Alan Greenspan said on Thursday the U.S. economy is still at risk of weakening more than anticipated, but added the aggressive interest rates cuts the Fed has already made this year should offer the economy "substantial" support by year end.

"This period of sub-par economic growth is not yet over, and we are not free of the risk that economic weakness will be greater than currently anticipated, requiring further policy response," Greenspan said in a speech to the Economic Club of New York.

"We also need to be aware that our front-loaded policy actions this year should be providing substantial support for a strengthening of economic activity later this year," he said.

The Fed has slashed rates five times this year by a total of 2-1/2 percentage points to lows not seen since 1994.

Reaction in Asian markets after the speech was released was muted but the dollar softened slightly versus the yen.

Greenspan cautioned that consumer spending, while currently soft but not "unduly" so, could weaken over the next few quarters because of declines in personal wealth.

"There are also downside risks to consumer spending over the next few quarters," he said. "We can expect the decline in wealth that has occurred over the past year to restrain household spending relative to the growth of income, just as the previous increase gave an extra boost to household demand."

"Furthermore, most survey measure suggest consumer sentiment, while having stabilized recently, remains fragile."

Greenspan stressed that inflation was under control and that he expected it to remain so in the near future, suggesting the Fed has room to lower rates without risking a flare-up in price pressures.

"The lack of pricing power reported overwhelmingly by business people underscores an absence of inflationary zest," he said. "With energy inflation probably peaking and the easing of tightness in labor markets expected to damp wage increases, prices seem likely to be contained."

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