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Greenspan Sees US Economic Recovery Gaining Strength - 2004-06-15

Federal Reserve Board chairman Alan Greenspan has given an upbeat assessment of the U.S. economic recovery. Mr. Greenspan appeared Tuesday before a congressional committee that is considering his nomination for a fifth four-year term in office.

Mr. Greenspan says the economy is growing in a solid fashion. Despite growth that has reached 4.5 percent [annually], the Fed chairman believes inflationary pressures are not likely to be a serious concern. The latest inflation report showed that U.S. consumer prices, while rising faster than in the immediate past, still show annual inflation below two-percent.

Mr. Greenspan gave no hint of whether the central bank will raise short-term interest rates at its next meeting two weeks from now. Financial markets anticipate at least a quarter point rise in the overnight fed funds rate. The central bank has not raised short-term rates in three years and most U.S. rates are at 40-year lows.

Mr. Greenspan was asked whether he agrees that Chinese and Japanese products sold in the United States benefit from exchange rates held artificially low against the dollar. While the Fed chairman would not comment directly, he did say that he expects both countries will refrain in the future from manipulating their currencies' value. He said Chinese policy makers are aware that a growing trade surplus with the United States worsens domestic economic problems.

"And this [accumulation of dollars, which add to the money supply] creates problems that are obviously exaggerating difficulties with respect to underlying inflationary pressures and boom conditions which they're endeavoring, apparently successfully, to constrain," he said.

Mr. Greenspan is suggesting that the Chinese will eventually allow their currency to rise against the dollar. Similarly, the Fed chairman is not unduly worried about Chinese and Japanese accumulation of U.S. government securities or debt.

"There is an unquenchable demand to hold assets or claims against American residents, largely because they're presumed to be safe and to have significantly higher rates or return-adjusted for risk-than most other areas of the world," he said.

Mr. Greenspan, 78, who is certain to be confirmed by Congress for a new four-year term, said the U.S. economy must remain open and flexible in order to withstand unanticipated economic and financial shocks.