By Martin Crutsinger
The Associated Press

WASHINGTON - The Federal Reserve is ready to raise interest rates more quickly than its current "measured" pace if inflation suddenly worsens, Chairman Alan Greenspan said Tuesday.

Still, Greenspan delivered a generally upbeat assessment of economic prospects to Congress, seeking to allay concerns that a pronounced dip of economic activity in June could turn into something more severe. He said a slowdown in consumer spending, which accounts for two-thirds of the total economy, appeared to be "short-lived," with preliminary indications that July growth was already rebounding.

The economy was moving through a "soft patch," based on a number of weaker-than-expected statistics in June, he said.

Delivering the Fed's midyear economic outlook to the Senate Banking Committee, Greenspan said that in most respects economic conditions through the first half of the year have "been generally quite favorable," with overall growth at a strong rate that has finally generated a significant rebound in job growth.

He did say inflation figures had risen, but he attributed much of the increase to "transitory factors" such as a spike in oil prices.

On June 30, the Fed, for the first time in four years, boosted its target for the federal funds rate, the interest that banks charge each other on overnight loans, by a quarter-point to 1.25 percent, up from a 46-year low of 1 percent. The fed said further rate increases would likely be "measured."

Economists have interpreted the word "measured" as meaning the central bank will boost rates in a series of quarter-point moves at its regular meetings for the rest of this year and into 2005, aiming to get the funds rate up to around 4 percent, a so-called neutral level that would neither stimulate economic growth nor hold it back. They are looking for the next quarter-point rate increase to occur at the Fed's Aug. 10 meeting.

Greenspan said the Fed had two general scenarios in mind. In one, inflation remains contained and the Fed can move slowly to raise rates. In the other, the central bank has to accelerate its rate increases to battle rising prices.

Some senators worried the Fed could overdo its rate tightening because of unfounded concerns about inflation.

Sen. Jim Bunning, R-Ky., said that since the Fed's June rate increase, the stock market has fallen significantly and he was worried that June's "hiccup" could "turn into the flu."

Greenspan assured senators that the Fed was closely monitoring economic developments both on growth and inflation in calibrating its next rate moves.