Federal Reserve Chairman Alan Greenspan sought to calm unsettled financial markets Wednesday by offering an upbeat assessment of the economy's prospects.
"Despite the always present future uncertainties, the outlook for the U.S. economy is as bright as it has been in decades," he told the House Budget Committee. "Economic activity has strengthened, unemployment is down, and price trends have remained subdued."And Greenspan assured currency traders that he and Treasury Secretary Lloyd Bentsen "have been following developments very closely because we cannot be indifferent to major movements in our currency."
The chairman of the committee, Rep. Martin Olav Sabo, D-Minn., said lawmakers were very interested in questioning Greenspan about the market turmoil, but Greenspan said he did not intend to address the matter in his prepared testimony.
Greenspan and Bentsen have two options should they decide to try to prop up the sagging value of the dollar. They could lead the central banks of U.S. trading partners in a massive dollar-buying campaign - a step taken with temporary success on May 4.
Or, the Federal Reserve could raise short-term interest rates in the United States. This would create demand for the dollar by making dollar-denominated securities more attractive to investors.
Greenspan refrained from even hinting on U.S. officials' plans. But, even before he spoke, stock and bond prices rose in early trading and the value of the dollar firmed. The greenback had plunged to a post-World War II low against the Japanese yen on Tuesday.
In his prepared text, Greenspan sounded an optimistic tone with only a few cautionary notes.
Although inflation hasn't increased, Greenspan said the central bank was watching carefully for signs of emerging inflationary pressures in labor markets and in manufacturing capacity.
The unemployment rate has fallen from 6.7 percent at the start of the year to 6 percent in May.