Washington Federal Reserve Chairman Alan Greenspan acknowledged Thursday that America's record-breaking economy may be slowing to a more sustainable pace, but also said inflation dangers still lurk.
While Greenspan's remarks to the Senate Banking Committee left the door open to higher interest rates, Wall Street investors and economists viewed them as encouraging signs that the central bank's 13-month anti-inflation campaign may be nearing an end.
During that period, the Fed has raised interest rates six times in an effort to slow the economy and consumer spending, which accounts for two-thirds of all economic activity.
Presenting the Fed's midyear economic report to Congress, Greenspan said the pace of spending by consumers on goods and services may be moderating, helping to bring demand more in line with the economy's ability to produce. In addition, the most interest-rate-sensitive sector of the economy housing appears to be cooling.
"It is clear that, for the time being at least, the increase in spending on consumer goods and houses has come down several notches, albeit from very high levels," Greenspan said.
In the latest evidence that the Fed's interest-rate increases are slowing the economy, the Commerce Department reported Thursday that housing construction fell 3 percent in June to a seasonally adjusted annual rate of 1.55 million, the lowest level in more than two years.
On Wall Street, stocks surged as investors, emboldened by Greenspan's encouraging remarks on the economy, poured back into the markets after two days of losses. The Dow Jones industrial average gained 147.79 points to close at 10,843.87. The Nasdaq rose 128.93 to 4,184.56.
Economists also were encouraged.
"It sounds as if he is inclined to keep rates on hold at the August 22 Fed meeting unless there is some disturbing news between now and then," said First Union's chief economist, David Orr.
Added Bruce Steinberg, Merrill Lynch's chief economist: "In our opinion, the Fed has engineered a soft landing and no more tightening will be necessary."
Even with the promising signs that the economy is slowing, inflation risks remain, Greenspan said.
He raised concerns that the tight labor market could lead workers to demand big boosts in wages and benefits costs that could be passed along to consumers as higher prices, meaning more inflation.
"It is much too soon to conclude that these concerns are behind us," Greenspan said.
The Federal Reserve's Web site: www.federalreserve.gov.