Alan Greenspan, Federal Reserve chairman, warned on Wednesday that risks following last month's terrorist attacks would impose a burden on the economy but said the economic shock would be temporary.
Mr Greenspan told members of joint House and Senate economic committee that the attacks would likely raise insurance premiums, security and other costs.
He voiced support for the general idea of government assuming some of the risk and insurance costs of future terrorist attacks.
While he did not expect the attacks to drag as heavily on the US economy as the Cold War did, Mr Greenspan said the intense campaign to prevent further attacks would put a "one-time" damper on US productivity growth and living standards, as markets adjusted and resources were diverted from the creation of wealth and consumption to the enhancement of security.
"The level of productivity will presumably undergo a one-time downward adjustment as our economy responds to higher levels of perceived risk," he said.
However, the "prospects for ongoing rapid technological advance and faster productivity growth" were "scarcely diminished".
In what may mark a departure from earlier prognoses, the Fed chairman hinted that productivity growth would return to levels above the 1970-1995 average, but not the rapid rates of the past five years.
Once the economy adjusts to new risks, "productivity growth should resume at rates in excess of those that prevailed in the quarter-century preceding 1995," Mr Greenspan said.
The Fed chairman said the attacks had occurred just when the US was showing "tentative, but encouraging" signs of "stabilisation" from its year-long slowdown. In the immediate aftermath of the attacks, "the level of [economic] activity declined significantly", he said.
"As the initial shock began to wear off, economic activity recovered somewhat... though the recovery has been uneven," he said.
But Mr Greenspan cautioned "nobody has the capacity to fathom fully how the effects of the tragedy of September 11 will play out in our economy". That would become clearer with time, he said.
In response to questions from lawmakers, Mr Greenspan said monetary and fiscal policy alone could not eliminate the risk of recession. He said he supported the reduction - if not elimination - of the capital gains tax, but said it would provide little immediate stimulus.
Separately, the Commerce Department said starts on the construction of new homes rose in September, but failed to erase August's steep losses. Mr Greenspan said the outlook for the housing market was murky.