Federal Reserve Chairman Alan Greenspan said yesterday that the U.S. economy is "going through a soft patch," but that it won't hold back a "broadening" economic expansion that has gained momentum this year.

High energy prices in recent months have both boosted inflation and sapped consumers' spending power, Greenspan told members of the Senate Banking Committee at a semiannual hearing on Fed policies.

But the recent flare-up in inflation should prove temporary, Greenspan said, adding that the Fed still expects to raise short-term interest rates only gradually in coming months.

"Those higher prices, by eroding households' disposable income, have accounted for at least some of the observed softness in consumer spending of late, a softness which should prove short-lived," Greenspan said.

Despite such problems, he said, "economic developments in the United States have generally been quite favorable" this year. "Not only has economic activity quickened, but the expansion has become more broad-based and has produced notable gains in employment," he said.

Greenspan rejected suggestions that the economy has shown signs of "significant weakness developing." Retail sales, industrial production, housing starts and the pace of job gains all fell in June, causing some analysts to wonder whether the economy was falling back into an uneven, halting recovery after months of relatively strong growth.

Many analysts estimate that economic growth slowed in the past three months to an annual rate below the 3.9 percent pace of the first quarter.

"While there has been weakness in June. . . . I might say that July seems to be somewhat better, even though we are going through a soft patch," Greenspan said in response to a question from Sen. Elizabeth Dole (R-N.C.). "There is no real underlying evidence of any cumulative weakness here."

However, Greenspan conceded that the economy does not feel like it is "charging ahead," a fact he attributed to lingering business cautiousness after the Sept. 11, 2001, terrorist attacks and the corporate scandals of the following year.

He noted, for example, that businesses continue to hire relatively more temporary employees.

But he also stressed signs that "conditions in the labor market are improving." He noted that the number of U.S. jobs rose by an average 200,000 per month in the first half of this year. That is up "sharply," he said, from a pace of roughly 60,000 jobs added per month in the last quarter of 2003.

However, the number of monthly job gains has declined for three months from a peak this year of 353,000 in March to 112,000 in June. That is below the roughly 150,000 additional jobs a month that many economists believe is needed to keep up with population growth.

"Expanding employment should provide a lift" to consumer spending, Greenspan said. With households in generally good financial shape and interest rates still relatively low, he said, the situation "bodes well for consumer spending."

Overall, the economy appears to have grown at an annual rate of less than 4 percent in the first half of this year, a slowdown from more than 6 percent annual rate in the last half of 2003.

But Greenspan said developments this year have lent "increasing support to the view that the expansion is self-sustaining," meaning that growth should continue to generate more growth, even as interest rates rise and the effect of recent tax cuts fades.

Fed policymakers generally estimate that the economy will grow 4.5 percent to 4.75 percent this year, according to the report to Congress that Greenspan delivered yesterday. The top of that range is slightly less than the 5 percent they estimated in February.

Most Fed officials also estimate that inflation will remain tame this year, with consumer prices, excluding volatile food and energy items, rising 1.75 percent to 2 percent, according to a Commerce Department index.

Greenspan repeated that he and his Fed colleagues expect they probably will be able to raise short-term interest rates at a "measured" pace in coming months. Greenspan declined to be more specific, saying that Fed officials "have very purposefully refrained from defining what we mean by that term."

The Fed's top policymaking committee recently raised its benchmark short-term interest rate target to 1.25 percent, from 1 percent. Financial analysts have interpreted "measured" to mean raising the rate gradually, in small steps, of a quarter- to half-percentage point at a time, over many months. By not defining the term more specifically, the Fed avoids leaving financial markets with the impression that it has committed itself to a particular path of action.

Greenspan stressed the "considerable uncertainty surrounding the anticipated evolution of price pressures." And he reminded listeners that Fed officials are prepared to quicken or slow the pace of interest rate changes in coming months if their forecasts prove wrong.

Options traders in Chicago continue working while Fed Chairman Alan Greenspan's remarks to the Senate Banking Committee are televised. Fed Chairman Alan Greenspan said economic developments have been "quite favorable."