Federal Reserve Chairman Alan Greenspan sounded a note of cautious optimism in a speech before Congress Wednesday and attempted to allay fears about deflation, but the speech elicited little response from investors.

In testimony before the congressional Joint Economic Committee, Greenspan said a drop in energy prices, increases in productivity, better earnings and low interest rates could all help to bolster economy activity going forward. He also said during the ensuing question and answer session that there was "no credible possibility" that the central bank would run out of ammunition to deal with the threat of deflation.

"I think he was easing some of the fears about deflation that have been way overblown," said David Gitlitz, chief economist at Trend Macrolytics.

Although stocks initially trimmed their losses on the news and bonds lost ground, the speech also provided plenty of fodder for the bears. Greenspan said a pickup in economic activity is "not unreasonable" but he also warned that the timing and extent of the recovery are in question.

"People are not satisfied," said Steven Wieting, an economist at Salomon Smith Barney. "There's got to be something to latch onto and I don't think he provided us with that much."

The Fed chief noted that recent data on both the labor markets and industrial production have been "disappointing," but he said this mostly reflects business decisions made prior to the war with Iraq.

"We do not yet have sufficient information on economic activity following the end of hostilities to make a firm judgment about the current underlying strength of the real economy," Greenspan said.

On the subject of oil prices, Greenspan said he was pleased that prices had dropped about $10 a barrel from their prewar peaks and noted that energy prices "seem likely to be a favorable influence on the overall economy." Still, he said "prices have risen to near $30 a barrel -- a worrisome trend if continued."

Despite calming fears of deflation in the Q&A period, Greenspan's testimony echoed remarks made during the last Federal Reserve policy meeting that "the probability of an unwelcome substantial fall in inflation over the next few quarters, though minor, exceeds that of a pickup in inflation."

Merrill Lynch senior economist Gerald Cohen said the speech suggests the Fed will wait until after the June FOMC meeting before taking any action on monetary policy.

" Greenspan said many more weeks of data will be needed to confidently discern the underlying trend of the economy, which suggests that the Fed may want to wait until after the June FOMC meeting to decide that either the economy is picking up or the rebound is not strong enough," Cohen said. "He raised the issue that maybe people are overreacting to the data we're seeing."

The economic reports in recent weeks have not materially altered the outlook, Greenspan said. "Recent readings on production and employment have been on the weak side, but the economic fundamentals -- including the improved conditions in financial markets, and the continued growth in productivity -- augur well for the future period."

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