Greenspan Hints at More Cuts in Rates

Offering hope of further interest rate cuts, Federal Reserve Board Chairman Alan Greenspan warned on Wednesday that a “fear-induced psychological response” gripping the world’s financial markets is bound to cramp the U.S. economy.

“We are clearly facing a set of forces that should be damping demand going forward,” Greenspan said. “We do not know how far it will go, or how much it will affect consumer and business spending here at home.”

But he told the National Assn. of Business Economists, “This is a time for monetary policy to be especially alert.”

His comments almost interrupted a string of stock market losses that have occurred this week as the annual meetings of the International Monetary Fund failed to produce a clear strategy to combat the crisis.

The Dow Jones industrial average shot up 113 points immediately after his speech, then settled back and closed at 7,741.69, down 1.29 points.

“He all but said, ‘We very likely are going to lower rates again,’ ” said economist Allen Sinai of Primark Economic Associates in New York. “And interest rates--always--are more important than words. They’re very important for the pocketbooks of billions of people on this planet.”

In an effort to support borrowing and spending, Fed policymakers last week cut the benchmark interest rate on overnight loans between banks by a quarter of a percentage point. They will meet again Nov. 19.

“Between now and next spring, I wouldn’t be surprised to see three more cuts,” said economist Sung Won Sohn of Norwest Corp. in Minneapolis.

Last week’s Fed action came a month after the collapse of the Russian ruble, which triggered what Greenspan called a “quantum shift” in market sentiment marked by plunging stock prices and a worldwide flight from risky investments.

“It has been a fairly dramatic, broad and as yet seemingly incomplete adjustment,” he said. “This thing hasn’t come to an end yet.”

He attributed some of the shift to “a positive, conscious, calculated adjustment” in response to changing risks. But some of the desire for liquid--that is, easily bought and sold--investments is “a fear-induced psychological response” to rising uncertainty, he said.

“When you’re crossing the street and you’re uncertain as to whether a car is coming, you stop. You disengage,” he said. “And when you are uncertain about commitments in the marketplace, you disengage.”

“Individuals . . . are basically saying, ‘I want out. I don’t want to know anything about whether a particular investment is risky or not,’ ” he said.

The drop in U.S. stock prices since a midsummer peak, partly offset by increased bond prices, has destroyed $1.5 trillion in wealth held by U.S. consumers and businesses, Greenspan said.

So far that doesn’t seem to have significantly hurt the broader economy or job market, he said. “But we’re bound to see a major impact in personal consumption expenditures and housing.”

Even before the latest turmoil, growth in consumer borrowing lapsed in August to a 4.4% annual rate, the slowest pace in three months. And that was despite a revival in automobile lending reflecting the end of the General Motors Corp. strikes, the Fed said separately.

Greenspan said a federal survey of bank lending officers released last week showed “a major shift” among larger banks toward tighter standards for loans to large companies.

Still, he said, “We are far short of anything that could resemble a credit crunch in the United States.”

The central bank chairman, who regularly made gloomy pronouncements during stocks’ phenomenal upward climb, cautioned against too much pessimism.

“If you read the newspapers . . . one gets the impression the economy has collapsed and we might as well all go home and go fishing,” he said. “The truth of the matter is that we have got an economy which, as of now, . . . is really still quite an impressive sight.”

At the same time, he said, “It’s pretty obvious . . . the outlook for 1999 for the U.S. economy has weakened measurably.”