Fed Chair: Economy Still Fragile

Federal Reserve Chairman Alan Greenspan 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.

"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.

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.

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.

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 his highly regarded by members of both parties.