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Greenspan: Economy turning a corner, but slowly

Fed chairman says inflation remains quiescent, allowing further interest- rate cuts if needed to spur a rebound.

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Barely had Federal Reserve Chairman Alan Greenspan opened his mouth in testimony to Congress yesterday than he told Wall Street what it anxiously wanted to know:

Yes, underlying inflation remains at a "modest rate."

Yes, the Fed will cut interest rates further if the currently slack economy requires.

Yes, the Fed expects the economy to start recovering later this year. It projects growth of 1.25 to 2 percent this year, and about 3 percent next year.

And yes, there is "ample evidence" that the nation is experiencing only "a pause" in the innovations that have boosted productivity since 1995 - a key factor paving the way for rising standards of living.

While the overall message was positive, it was also largely expected. The initial reaction of stock market investors was not enthusiastic. Apparently hoping for a cheerier hint of a quick rebound, they drove share prices down in the morning.

For many economists, the remarks confirmed a consensus that America is on a path toward growth - but at a sub-par rate.

"The risks would seem to remain mostly tilted toward weakness," the veteran central banker said in one of his twice-yearly reports on the economy.

Mr. Greenspan also offered an informative explanation of why the Fed has eased monetary policy and and of the limitations of the Fed in its efforts to manage the economy and stabilize prices.

Other economic news yesterday was mixed. Consumer prices rose by 0.2 percent in June. If food and energy are excluded, the "core" rate of inflation was 0.3 percent. Both increases were slightly more than had been expected. A rise in housing prices was a big factor.

Another report by the Labor Department found that weekly earnings were about unchanged from May to June. And for the past 12 months, wages rose by just 0.3 percent after inflation. (Price increases ate up most of a 3.6 percent gain in weekly earnings.) Meanwhile, even as home construction sped ahead in June, new building permits declined.

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