The US economy is still recovering from a slow period that began during the summer, Federal Reserve board chairman Mr Alan Greenspan said.
"The limited evidence since the November easing (of policy) has supported our view that the US economy has been working its way though a soft patch - and that patch has certainly been soft," Mr Greenspan said in a speech prepared for delivery to the Economic Club of New York.
"The recovery ran into resistance in the summer, apparently as a consequence of a renewed weakening in equity prices, further revelations of corporate malfeasance and then the heightened geopolitical risks," Mr Greenspan said.
The Fed's 50 basis point rate cut on November 6th was "some insurance against the possibility that the weakening would gain some footing.
"Although our most probable forecast already was that growth would pick up, we judged the cost of the insurance provided by additional easing as exceptionally modest because we viewed the risk of an imminent rise in inflation as remote," he said.
"Oil prices have recently risen and, not least, the economies of most of our major trading partners have shown little vigor," he said.
Since October, conditions in financial markets "have turned less adverse," Mr Greenspan said. Corporate yield spreads have narrowed significantly, although they remain quite elevated relative to early 2000.
The Fed chairman said there has been some recent increase in business lending and this "may hint at some stirring in capital investment but it is simply too early to tell."
Renewed business investment will be most dependent on the outlook for profits and "the resolution of the uncertainties surrounding the business outlook and the geopolitical situation.
"Any significant fall in the current geopolitical and other risks should noticeably improve capital outlays, the indispensable spur to a path of increased economic growth," Mr Greenspan said.
In his prepared remarks, the Fed chairman noted that the US economy "is nowhere close to sliding into a pernicious deflation" but he said that the meaning of deflation is being actively studied inside and outside the Fed.
In general, Greenspan said, "deflation is more of a threat to economic growth than is inflation ... Clearly, it would be desirable to avoid deflation but if deflation were to develop, options for an aggressive monetary policy response are available."
Because there are "real or speculative" concerns that deflation can be created by the bursting on an asset bubble, some analysts have urged the Fed to prevent bubbles, Mr Greenspan said.
However, he argued that it remains in doubt whether central bankers can detect an incipient bubble and whether they could defuse one without doing greater damage to the economy.
"Among our realistically limited alternatives, dealing aggressively with the aftermath of a bubble appears the most likely to avert long-term damage to the economy," he said.
AFP