Not only has economic activity quickened, but the expansion has become more broad-based and has produced notable gains in employment, Greenspan told the Senate Banking Committee in his carefully worded semiannual address to Congress following the Fed's review of monetary policy.

He added that while economic improvements have led to inflationary pressures and higher prices, some of which can be attributed to transitory rises in energy costs, the recent slips in consumer spending should be short-lived.

Nevertheless, he cautioned that if inflation pressures worsen, the Fed is prepared to keep prices from spiraling upward.

The Federal Reserve will pay close attention to incoming data, especially on costs and prices, Greenspan told the Senate Banking Committee. As always, considerable uncertainties remain about the pace of the expansion and path of inflation.

The Fed raised interest rates for the first time in four years June 30 to 1.25 percent, from a 46-year low of 1 percent.

Those low rates were considered a prime factor driving consumer spending, particularly high housing purchasing and building rates in recent months.

But earlier in the day the Commerce Department released data showing that new housing starts unexpectedly dropped 8.5 percent in May to an annual rate of 1.802 million new homes, defying expectations.

In questioning from lawmakers, Greenspan largely dismissed concerns about June's slowed economic numbers and said the fall in new construction reflected the rise in housing starts and purchases in the lead-up to the Fed's anticipated June rate hike, a move he describe essentially as borrowing from future housing starts.

Household growth is holding up reasonable well, said Greenspan. At some point we will slow down, but I see no evidence that this slowdown is occurring. I see the overall demand will remain reasonably solid, although less than the peaks we have seen in recent months.

Overall, he said that financial markets, along with households and businesses, seem reasonably well prepared to deal with the more neutral monetary-policy path being pursued.

Most economists believe that more interest-rate hikes are coming -- the next being a quarter-point hike during the next Federal Open Market Committee meeting Aug. 10.

Although much has been made of the Fed's talk of the potential for measured increases in the coming months, Greenspan shed little light Tuesday on exactly what the use of that term by the Fed in its June rate-hike announcement means in light of the current state of the economy.

On Tuesday the Fed also released its updated economic outlook for the year, which outlined slightly higher inflation expectations and lower growth than was originally estimated for 2004.

The committee currently predicts inflation will run between 1.75 and 2 percent for the year, up from February's forecast of 1 percent to 1.25 percent for the year, and predicts economic growth with fall somewhere between 4.5 percent and 4.75 percent for the year, slightly lower than the potential peak of 5 percent predicted earlier this year.

With unemployment currently running at 5.6 percent nationwide, the Fed continues to predict that unemployment will average 5.25 percent to 5.5 percent in 2004.

When asked by Sen. Elizabeth Dole, R-N.C., about the domestic job picture, Greenspan said that there are differing facets to the current job market.

While people who are losing jobs are having difficulty finding wages that match the levels they originally received, he said this is a typical part of labor-market movements.

In addition, he said that that more workers are currently going into industries with pay levels slightly below the national average.

Nevertheless, he dismissed criticisms that the new jobs being created in the U.S. economy are dominated by lower pay scales, a common argument heard from Democrats in response to the job gains made over the last year.

Are we downgrading types of jobs created, say over the last year? said Greenspan. We find very little evidence of that.

U.S. markets held their slight gains in the late afternoon Tuesday following the mostly upbeat comments from the Fed chairman, which held no real surprises for market watchers.

In terms of the political impact, Greenspan's testimony mostly serves to shore up the Bush administration and Republican party's argument that the economy is expanding and doing well following the slowdown that has marked President Bush's term in office.

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