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Greenspan: Economy Has Regained Traction

The U.S. economy is pulling out of its recent slowdown that was triggered by a sharp spike in oil prices, Federal Reserve chief Alan Greenspan (search) said Wednesday in remarks economists saw as cementing a September rate rise.

"The most recent data suggest that, on the whole, the expansion has regained some traction," the U.S. central bank chairman told the House Budget Committee (search).

Greenspan said that two key indicators, consumer spending and housing construction, bounced back in July after a weak performance in June.

"Economic activity hit a soft patch in late spring after having grown briskly in the second half of 2003 and the first part of 2004," Greenspan told the committee.

Still, Greenspan was not as bullish in his 2-1/2 hours on Capitol Hill as some investors had expected. That, coupled with his lack of concern about the impact of oil prices on inflation, set the euro surging against the U.S. dollar on expectations for a gradual tightening cycle.

"Despite the rise in oil prices through mid-August, inflation and inflation expectations have eased in recent months," the Fed chief said.

"If it weren't for the oil price spike, I would be very optimistic about where the economy is going," Greenspan said later in response to lawmaker questions.

Economists saw his overall tone as marginally more upbeat than the Fed statement that followed its last policy meeting, when it raised interest rates by a quarter percentage point to 1.50 percent, the second increase this year.

A Reuters poll on Friday forecast the Fed would raise rates by another quarter point at its Sept. 21 meeting.

"The chairman's remarks clearly signal rates will rise this month, though we remain of the view that a November hike is not yet a done deal," said Ian Shepherdson, chief U.S. economist at High Frequency Economics (search).

Many of the analysts polled saw the bellwether federal funds rate at 2 percent by year-end, implying no rate rise at either the November or December meetings.

Greenspan made no comments in his prepared remarks on the direction of interest rates.

He said that this year's slowdown "in activity no doubt is related, in large measure, to this year's steep increase in energy prices."

The big jump in energy prices acts like a tax on consumers, leaving them less money to spend on other items.

In answer to questions, Greenspan told the panel that if it had not been for the jump in oil prices this year, he believed the country would "still be seeing some very strong growth."

Greenspan refused, however, to quantify how much the oil price increase had reduced growth, saying it had affected the economy in a number of ways such as depressing consumer confidence.

Turning to the politically charged issue of the budget, Greenspan said the record deficit should shrink this year but long-term problems still lurk.

"With the economy continuing to improve, the deficit is more likely to decline than to increase in the year ahead," he said. "Nonetheless, the prospects for the federal budget over the longer term remain troubling."

He said current fiscal policy should aim at keeping debt levels as low as possible and repeated his call for the renewal of lapsed rules to enforce more budget discipline.

"We're going to be running into very severe pressures in later years, and the better we are prepared in moving into that period, the more likely it is that we will address it in a rational, sensible rational way," Greenspan said.

The Fed chief reiterated that he feared Social Security and Medicare programs were not sustainable in their current form, but steered clear of offering policy prescriptions.

Reuters and the Associated Press contributed to this report.