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Fed is confident foundations solid

Greenspan says recovery assured despite disruptions

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WASHINGTON — The U.S. economy "ground to a halt" after last week's terrorist attacks and will suffer disruptions for sometime, Federal Reserve Chairman Alan Greenspan told Congress Thursday. He said he is confident that the foundations are intact and that recovery is assured.

"The shock of Sept. 11, by markedly raising the degree of uncertainty about the future, has the potential to result, for a time, in pronounced disengagement from future commitments," the Fed chief told the Senate Banking Committee.

The session, at which Greenspan was joined by Treasury Secretary Paul O'Neill and Securities and Exchange Commission Chairman Harvey Pitt, opened with a moment of silence in remembrance of the thousands who died when hijackers slammed commercial jetliners into the World Trade Center in New York and into the Pentagon.

Both the U.S. central bank chief and O'Neill were at pains to emphasize that economic prospects for the world's No. 1 economy were sound and that financial markets were working.

"Our economy — our prosperity — will not be destroyed," O'Neill said in his remarks to the committee, while conceding that "We cannot say at this very preliminary stage exactly how these events will affect the economy."

The Treasury secretary had tears in his eyes as he began his testimony, in which he said the government would have no difficulty in meeting its financing needs despite costs from the attack that are not yet fully known.

Testimony from the nation's top economic policymakers did nothing to stem losses on U.S. stock markets as worried investors drove the Dow Jones industrial average down by more than 320 points in midafternoon trading.

Since stock trading resumed on Monday — after being halted for four days following the attacks — the Dow Jones index had plunged more than 10 percent as of Wednesday's close.

Greenspan said the attacks "strike at the roots of our free society," which rely partly upon a belief that commitments made today will be honored indefinitely into the future.

"The greater the degree of confidence in the state of future markets, the greater the level of long-term investment," he said. That is why consumer and business fears about coming months and years will cause immediate economic weakness.

"Indeed, much economic activity ground to a halt last week," Greenspan said. "But the foundations of our free society remain sound, and I am confident that we will recover and prosper as we have in the past."

The U.S. central bank on Monday slashed short-term interest rates for the eighth time this year and has injected tens of billions of dollars into the banking system to ensure ample liquidity to keep markets functioning.

Greenspan's offered no hints in his opening comments to lawmakers as to whether the Fed was considering further rate cuts, but analysts predict more are coming.

O'Neill, who has been urging investors all week to "buy American," said the best thing ordinary citizens could do would be to carry on normally to help the nation back to its feet.

"Each and every American should know that by continuing to work and spend, they are doing their part to restore our nation and our economy in the wake of last week's attack," he said.

Greenspan cautioned lawmakers, who are pondering new stimulus measures, that it will take some time to know the full impact of the attacks which leveled the World Trade Center and damaged the Pentagon, leaving close to 6,000 dead or missing, on U.S. economic activity.

Greenspan met privately Wednesday with congressional leaders, some of whom said afterward that he counseled them not to rush new stimulus proposals before knowing how the economy will perform.

In his testimony, Greenspan noted that U.S. economic activity was weak even before the attacks.

"Stability was only barely becoming evident in the United States in the period immediately preceding the acts of terrorism," he said.