Wed Jul 21, 2004
By Tim Ahmann

WASHINGTON, July 21 (Reuters) - Federal Reserve Chairman Alan Greenspan told Congress on Wednesday U.S. businesses remain guarded in their spending and hiring, but said the economy could benefit next year if their caution lifts.

In a second day of testimony on the central bank's semi-annual monetary policy report, Greenspan told the House of Representatives Financial Services Committee corporate America had shown an unusual reluctance to make new capital investments, build inventories and take on permanent hires.

"We are far from behaving the way we typically did (in other expansions)," the Fed chief said in answering questions before the panel, pinning the corporate constraint on a number of "caution-creating factors."

"To the extent these are capable of being assuaged, what it probably will be doing is rather than creating a large surge in economic activity, is to gradually stretch it out, if indeed a degree of confidence gradually returns," Greenspan said. "That would be one the reasons why a gradual expansion which we now seem to be experiencing does bode well for next year."

Greenspan cited the bursting of the U.S. stock market bubble in 2000 and ensuing corporate scandals as factors that had cut into businesses' willingness to take risks.

He also said fears of possible terrorist attacks were likely at play. "I think that the issue of potential terrorism is latent. It's there," he said, adding: "I have no way of making a judgment as to how significant it is."

STICKING TO THE SCRIPT

In his formal remarks to the House panel, Greenspan stuck to the script he used on Tuesday when he appeared before the Senate Banking Committee.

He reiterated that the economy appeared to be in a sustainable expansion that no longer required the hefty monetary stimulus the Fed put in place through a string of interest-rate cuts dating to early 2001.

The central bank began withdrawing that stimulus last month, when it bumped the overnight federal funds rate up by a quarter-percentage point to 1.25 percent.

He also restated that Fed policy-makers believed the process of bringing rates up to a more normal level from the 1958 low of 1 percent reached a year ago would likely proceed at a "measured" pace -- language markets widely interpret as meaning a series of quarter-point moves.

However, he warned that a "less gradual" approach could be needed if price pressures build faster than the Fed expects.

U.S. bond prices continued to fall on Wednesday as investors saw the Fed chief as preparing markets for a slightly faster rise in interest rates than they had been anticipating. The dollar added to Tuesday's gains.

Greenspan said a slowdown in economic activity last month, along with a pickup earlier this year in core inflation excluding food and energy prices, should prove fleeting.

LITTLE NEW GROUND

Under lawmaker questioning on Wednesday, Greenspan broke little new ground.

As he had on Tuesday, he restated his backing for rules to bring more discipline to the federal budget process, such as so-called pay-go regulations that would require new tax cuts or spending increases to be offset elsewhere in the budget.

Greenspan also repeated there was no evidence to buttress arguments that new jobs being created in the United States were lower-paying than the jobs that had been lost.

"We've not been able to find a significantly meaningful change in the quality of the jobs being produced relative to the quality of the jobs being lost for the nation as a whole over the past year," he said. (Additional reporting by Victoria Thieberger, Glenn Somerville, Andrea Hopkins, Alister Bull and Mark Felsenthal, Editing by Chizu Nomiyama, Reuters Messaging: tim.ahmann.reuters.com@reuters.net; e-mail: tim.ahmann@reuters.com; 1 202 898-8370))

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