Federal Reserve Chairman Alan Greenspan told Congress Thursday that he saw a number of encouraging signs in the recession-hit U.S. economy and cautiously embraced the idea of a recovery.

Greenspan said the economy underwent a "significant cyclical adjustment" last year, worsened by the Sept. 11 attacks. "But there have been signs recently that some of the forces that have been restraining the economy over the past year are starting to diminish and that activity is beginning to firm," he said.

Many economists have been forecasting that the Fed will decide not to cut interest rates when policy-makers next meet on Jan. 29-30. These analysts believe that the Fed has already done enough to spur a rebound from the current recession.

In his remarks on the economy, Greenspan sounded decidedly more upbeat than he had just 13 days ago when he warned in a San Francisco speech that the economy still faced "significant risks."

There had been published reports that Greenspan believed that Wall Street had reacted to his Jan. 11 speech too negatively, ignoring the positive signs he had also noted of a pending economic rebound.

Greenspan in his comments Thursday did not repeat worries about "significant risks," though he did mention factors that could dampen economic growth. However, he chose to focus on the various indications that the economy has begun to stabilize.

He noted that consumer spending, especially for autos and cars, had remained strong, and he said that there were signs that the huge wave of layoffs following the Sept. 11 terrorist attacks had started to abateployment benefits.

"Over the past month or so ... initial claims for unemployment insurance have decreased markedly, on balance, suggesting some abatement in the rate of job loss," Greenspan said.

But he cautioned that even with the improvement in weekly jobless claims, the overall unemployment rate could continue to rise for a time even after the economy begins growing again as businesses wait to see if the rebound is sustainable before hiring new workers.

The Fed chairman, who carries a considerable political heft when he weighs in on policy issues, offered few specifics in his testimony on the hot topic of fiscal stimulus except to say that the current budget picture was not dire, despite a massive reduction in the 10-year surplus forecast and an expected return to deficit spending in fiscal years 2002 and 2003.

But with the economy recovering, he questioned whether lawmakers need to proceed now with plans for a fiscal stimulus package. The White House, stymied by partisan bickering in its efforts to push a package through Congress, said later that it could change its view on the need for stimulus.

"Whether we do it or we don't, there are pluses and minuses. I do not think it is a critically important issue — I think the economy will recover in any event,'' Greenspan said.

At the same time, he urged lawmakers to be mindful of pressures that will face the budget in the future, when the baby boom generation reaches the retirement age around 2010.

Greenspan's comments come as the Senate prepares to debate a $69 billion stimulus package. The Democrat-backed package, considerably smaller than that backed by President Bush and congressional Republicans, includes tax cuts for new business investment, rebates for low-income workers, extended unemployment benefits and more aid to cash-strapped states.

The cautiously upbeat message from the Fed chief was coupled with a forecast from a White House economic aide that the economy would show modest growth in the first quarter of 2002 followed by more robust gains in the second half.

"First quarter GDP growth would be quite modest, second-quarter GDP growth a little bit more robust, and then very robust in (the) third and fourth quarters,'' Glenn Hubbard, Chairman of the White House's Council of Economic Advisers, said after a meeting with lawmakers on Capitol Hill.

Greenspan himself said he thought U.S. economic growth was near zero right now. In the third quarter, the latest for which the data are available, the economy contracted 1.3 percent.

Over the past two weeks, a spate of economic data from retail sales to jobless claims to manufacturing activity have beaten analyst expectations. Those reports, along with a push for reinterpretation of the Jan. 11 speech from Fed officials, have most analysts forecasting that the Fed will stand pat on interest rates when they meet next week.

In the Jan. 11 speech, the tone of Greenspan's remarks led markets to expect a quarter-point interest rate cut at the Jan. 29-30 meeting.

Responding to questions about that earlier speech, Greenspan admitted that he should have used better phrasing.

"It turned out that we showed a far greater degree of resiliency and flexibility and the economy stabilized (after Sept. 11),'' he said. "I was trying to make that point without getting to an issue of whether we were going to snap back quickly or not so quickly.''

He added: "That created, unfortunately, phraseology which in retrospect I should have done differently which implied that I didn't think the economy was in the process of turning, and I tried to rectify that in today's remarks.''

Analysts said he succeeded.

"Greenspan was more upbeat this time than he was last time. Obviously he can't say that everything is wonderful, but his view is evolving based on the flow of data since he spoke last,'' said Harvey Katz, chief economist with Value Line Inc.

Reuters and the Associated Press contributed to this report.