The chairman of the Federal Reserve, Mr Alan Greenspan yesterday hinted strongly that the prospects of a soft landing for the US economy were good.

Mr Greenspan, whose remarks were welcomed by the financial markets, told the Senate banking committee that the frantic pace of growth had slowed to a more sustainable rate in the last few months, with no sign of a let-up in the sharp rise in productivity.

Bonds and stocks rallied as investors calculated that Mr Greenspan's remarks meant the Fed was less likely to raise interest rates at the next meeting of its policy-making open market committee next month.

Mr Greenspan cited a combination of factors behind the slowdown in growth, including higher rates, a weaker stock market, and rising oil prices. And in an indication he believes the slackening may last, he said there was some evidence that consumers may have reached a ceiling on demand for new durable goods.

"It is certainly premature to make a definitive assessment of either the recent trends in household spending or what they mean," he said. "But it is clear that, for the time being at least, the increase in spending on consumer goods and houses has come down several notches, albeit from very high levels,".

Mr Greenspan warned, as he has in previous appearances, that even if growth slowed to a rate more in line with the economy's capacity, imbalances still threatened the stability of the expansion seen in the last nine years. But he was noticeably less pessimistic about the risks than he has been in the past.

The most important question that would determine the outlook for inflation and interest rates was the performance and productivity of workers' output per hour as the economy slowed, Mr Greenspan said.

If the economy continued to show strong productivity growth even as output slowed, the risks posed by unusually tight labour markets would diminish.

He said there were encouraging signs that productivity growth was continuing at its recent, elevated levels. "So far there is little evidence to undermine the notion that most of the productivity increase of recent years has been structural and that structural productivity may still be accelerating," he commented.

Mr Greenspan also presented the twice-yearly forecasts of the Fed's governors and regional bank presidents. Growth was expected to slow to a rate of about 4 to 4.5 per cent this year, while next year it would drop to between 3.25 and 3.75 per cent.

Inflation was expected to remain subdued at about 2.5 to 2.75 per cent this year, declining to 2 to 2.5 per cent in 2001. Unemployment would edge up next year to just a little above this year's 4 per cent rate.

But Mr Greenspan reiterated his concern about some uncertainties. Most importantly, he said, the sharp rise in oil prices had the potential for a significant adverse effect on the economy.