Federal Reserve chairman Alan Greenspan told Congress last night the US growth outlook was solid and the Fed will keep lifting interest rates.
But he warned "significant uncertainties" confront this positive prospect, including high energy prices, labour costs, the future path of long-term interest rates and the danger this could spell for the country's housing market.
"Our baseline outlook for the US economy is one of sustained economic growth and contained inflation pressures," Mr Greenspan, who is due to retire in January 2006, told the House of Representatives Financial Services Committee.
"In our view, realizing this outcome will require the Federal Reserve to continue to remove monetary accommodation.
His appearance was the first of two days of semiannual Congressional testimony on the economy and monetary policy.
Stocks initially softened on Greenspan's comments but later pushed ahead, with the S&P 500 index, one of the broadest measures of US equities, advancing to a new four-year high.
The Dow Jones posted an unofficial close of 10,686.37, up 39.81 points. The dollar also initially firmed and bond prices fell, but the currency subsequently drifted lower against the euro on technical selling while US government bonds won back lost ground in longer-dated maturities.
The Fed has raised rates in nine quarter-percentage point steps since June last year to 3.25 per cent and futures contracts imply a funds rate of 4 per cent by year-end.
Explaining one of the main risks to the economy, Mr Greenspan said the decrease in long-term interest rates, which have stayed low in the face of rising official interest rates, was "without precedent" and warned their future behaviour was critical.
Mr Greenspan said some regional housing markets, stimulated by low borrowing costs, have become gripped by "speculative fervor" although he dismissed worries that a drop in housing prices could damage the broad economy.
The Fed said the bond yield decline is in part due to a worldwide glut in savings, likely caused by insufficient global investment. Another culprit, Mr Greenspan said, is a perception in financial markets that economic risks have shrunk in the face of expectations the benign economic climate was here to stay.