US Federal Reserve Chairman Alan Greenspan struck a new and slightly upbeat note on the US economy in testimony to Congress yesterday, when he said that falling energy prices were boosting corporate profits and giving people more spending money.

The Fed chairman also highlighted unexpectedly high consumer confidence and a strong housing market as important factors which would prevent the US economy falling into recession. "The fabric of consumer confidence has not been breached," he said.

However Mr Greenspan essentially repeated the warning about the economy to the US Senate Banking Committee that he gave House members last week. "The period of sub-par economic performance is not yet over," he said, and "we are not free of the risk that economic weakness will be greater than currently anticipated and require further policy response."

The phrase "policy response" is code for rate adjustment, and his remarks left the markets convinced that the Fed will reduce short term rates for the seventh time this year when it meets on August 21st. The US central bank has already cut rates by 2.75 points to 3.75 per cent.

Further weakness in the economy could arise "from softer demand abroad as well as from domestic developments", Mr Greenspan said. "But we need also to be aware that our front-loaded policy actions this year coupled with the tax cuts under way should be increasingly affecting economic activity as the year progresses."

Defending his strategy against some aggressive questioning he promised senators it would work. "You essentially get very complex differences in the way monetary policy plays out," he explained, but "at the end of the day, it does seem to be effective."

A report on second-quarter growth comes out on Friday and economists expect that it will show the economy grew at a 0.9 per cent annual rate in the three months ending in June, after growing at 1.2 per cent in the first quarter.

Mr Greenspan also assured senators that despite economic problems in several countries including Japan and Argentina, there was little chance of a repeat of the type of contagion that brought about the Asian financial crisis in 1997.

"The tinder out there is much less than it was in 1997, there are few fixed exchange rates problems, the extent to which debt was extended is much less, the reserves are better."