Recovery has hit soft patch, says Greenspan

Alan Greenspan, chairman of the US Federal Reserve, warned yesterday that the world's largest economy had "hit a soft patch" as he justified last week's surprise half-point cut in American interest rates, writes Larry Elliott.

In testimony to Congress, Mr Greenspan said the squeeze on investment, high-profile corporate fraud, the bear market on Wall Street and the threat of war and terrorist attacks had combined to hinder the recovery of the US economy.

The bluntness of the Federal Reserve chairman's remarks was seen by analysts as evidence that the central bank would be prepared to cut rates again from their 41-year low of 1.25% should the economy fail to respond.

Mr Greenspan said that the US economy had shown resilience in the face of the blow to confidence provided by September 11, and had since grown at a respectable pace, but there were now signs that consumers were becoming more wary and that the corporate sector was facing higher costs for borrowing.

He added: "Although economic growth was relatively well maintained over the past year, several forces have continued to weigh on the economy: the lengthy adjustment of capital spending, the fallout from the revelations of corporate malfeasance, the further decline in equity values, and heightened geopolitical risks.

"Over the last few months, these forces have taken their toll on activity, and evidence has accumulated that the economy has hit a soft patch. Households have become more cautious in their purchases, while business spending has yet to show any substantial vigour.

"In financial markets, risk spreads on both investment-grade and non-investment-grade securities have widened. It was in this context that the federal open market committee further reduced our target federal fund's rate last week."