Greenspan: Fed Must Be Ready for Threats to Economy

WASHINGTON – Federal Reserve (search) Chairman Alan Greenspan (search) said Tuesday the central bank must stand ready to deal with a large number of possible threats to the economy, including another terrorist attack on U.S. soil.

Greenspan, nominated by President Bush for a fifth term as chairman of the Federal Reserve, made his remarks in prepared testimony before the Senate Banking Committee (search).

"Going forward, we must remain prepared to deal with a wide range of events. Particularly, notable in this regard is the fortunately low, but still deeply disturbing, possibility of another significant terrorist attack in the United States," he said.

In his prepared remarks, the Fed chairman did not directly say what the board's next move on interest rates would be. Fed policy-makers meet next on June 29-30 and economists widely expect them to boost short-term interest rates for the first time in four years at that time.

The Fed's main lever for influencing economic activity for nearly a year has been at 1 percent, a 46-year low. Most economists are forecasting a one-quarter percentage point increase. A few, however, are calling for a bolder, half percentage-point move.

In a question and answer period at the hearing, Greenspan repeated comments made last week, that Fed policy-makers probably can boost interest rates gradually to head off inflation, but he didn't rule out more aggressive action.

"Forecasts are subject to error," Greenspan cautioned. If Fed policy-makers' inflation and economic outlooks turn out to mistaken, the Fed will adjust monetary policy accordingly, he said. He didn't spell out what that would mean.

Greenspan's remarks came a few hours after the government released a report showing that inflation is on the rise. Consumer prices rose by 0.6 percent in May, the largest increase in more than three years.

Still, Fed policy-makers continue to hold the general view that "inflationary pressures are not likely to be a serious concern in the period ahead," Greenspan said. But policy-makers will be keeping a close eye on the direction of prices, especially energy prices, he added.

The Fed chief struck an optimistic note on the U.S. economy. "I think this particular recovery has some momentum in it and does not look to be short lived," he said during the hearing.

Greenspan, 78, has steered the economy as Fed chairman since 1987 and has served under four presidents.

In his testimony, Greenspan said that over the past 25 years the central bank has been able to deal with dangerous inflationary forces, the fallout from stock market crashes and a series of financial crises.

"These developments did not divert us from the pursuit and eventual achievement of price stability and the greater economic stability that goes with it," he said.

Greenspan said the economy was able to absorb the shocks of the Sept. 11, 2001, terror attacks and mount a recovery even though "remnants of the effect remain," he said.

To cushion the economy after the jolt of the attacks, the Fed flooded the banking system with money to make sure that all payment demands could be met. And, the Fed accelerated a series of interest rate cuts that had begun in January of 2001 to help bolster the economy.

The Fed chief said he and other Fed policy-makers learned a great deal about how to manage the economy through such an episode and continue to work to develop methods to protect the nation's banking system should another such devastating attack occur.

"Our efforts to further bolster the operational effectiveness of the Federal Reserve and the strength of the financial infrastructure continue today," he said.

Greenspan is expected to win easy confirmation because he is highly regarded by members of both parties. Senate Banking Committee Chairman Richard Shelby, R-Ala., and the panel's highest-ranking Democrat, Paul Sarbanes of Maryland, expressed support for Greenspan's nomination and predicted he would win swift approval.

Greenspan has told friends that he intends to retire when his separate 14-year term as a Fed board members runs out Jan. 31, 2006. Sarbanes acknowledged those comments, saying that decision would allow the next president, whoever is elected, to name a new Fed chairman early in his term.