Federal Reserve Chairman Mr Alan Greenspan told the US Congress today that economic growth in the United States is close to "stalling out" at the start of the year.
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While not forecasting a recession, he said the US faced a large number of "downside risks" but that there were also encouraging signs.
Shortly before Mr Greenspan spoke, the government reported that US retail sales surged by a strong 0.7 per cent in January, the biggest increase since September and a strong improvement from a lackluster 0.1 per cent December gain.
His remarks were interpreted by analysts as a clear signal that a further interest rate cut was possible, following his one per cent cut in two stages last month.
Wall Street and NASDAQ stocks continued a two-day recovery after his testimony.
America's top banker still believes however that "for the period ahead downside risks predominate."
"In addition to the possibility of a break in confidence, we don't know how far the adjustment" in business inventories will drive down production in the months ahead, he told the Senate Banking Committee in his semi-annual review of the economy.
He said that forecasters have great difficulty predicting recessions because full-blown downturns are often the result of unreasonable fear that overwhelms normal business and consumer buying decisions.
"This unpredictable rending of confidence is one reason that recessions are so difficult to forecast," Mr Greenspan said in testimony to the Senate Banking Committee.
"Our economic models have never been particularly successful in capturing a process driven in large part by nonrational behavior."
Mr Greenspan compared a total breakdown of consumer and business confidence to what happens when a dam breaks: "The torrent carries with it most remnants of certainty and euphoria that built up in earlier periods."