Greenspan Hints Fed Won’t Cut Rates Soon
Federal Reserve Board Chairman Alan Greenspan signaled Wednesday that the central bank is not likely to cut interest rates immediately, but he reaffirmed that it would be willing to move quickly if the U.S. economy slowed further and the global economic situation worsened.
He also denied that the world’s leading industrial democracies are about to engineer a coordinated international interest rate cut to help spur the world economy, as global financial markets have been expecting.
“I think that I can safely say that at the moment there is no endeavor to coordinate interest rate cuts,” he said. However, he added, “we are in fairly extensive conversation” with officials of other countries, and “we’re clearly exchanging views” on policy options.
Greenspan’s remarks, in testimony before the House Banking Committee, in effect reaffirmed his Sept. 4 assertion that the Fed has become concerned about the growing risks from the global economic picture and is prepared to cut short-term rates if it worsens.
At the same time, he and Treasury Secretary Robert E. Rubin, who appeared with him before the committee, sought to reassure nervous financial markets that the United States is actively engaged in mapping a strategy to prevent any global economic recession.
“The rest of the world looks to the United States, as the world’s indispensable nation, to show global leadership at times like these,” Rubin said. He added that finance ministers and central bankers of the leading industrial democracies are continually in touch on the issue.
Despite the buildup in expectations since Greenspan’s Sept. 4 speech, U.S. financial markets reacted calmly to his remarks Wednesday, dipping slightly, only to be buoyed later by President Clinton’s statement that he does not intend to resign.
The Dow Jones industrial average rose 65.39 points to close at 8,089.78--its fourth straight gain.
But Greenspan’s remarks, and those of Rubin that an aid package to Latin America was still in the discussion stage, disappointed markets in worried Brazil. The main stock index there fell 2.2%, after shooting up 7.2% before Greenspan spoke.
Still, prospects of a rescue helped slow the flight of foreign capital from Brazil on Wednesday. And optimism was fueled by a phone call from Clinton to President Fernando Henrique Cardoso, pledging that the U.S. “will not give up its support for Latin America and Brazil.”
Dana Johnson, chief Fed watcher at First Chicago Capital Markets, said that while U.S. markets were “clearly disappointed,” most analysts still expect the Fed to cut short-term interest rates at least slightly by the end of the year.
“It’s abundantly clear now that the Fed is going to be very sensitive to any evidence that growth is slowing significantly,” Johnson said. “What is unclear is whether they are going to be ready to move proactively before the data begin to show it.”
Greenspan was somewhat more bearish than usual in discussing the spreading global economic slump and its impact on the U.S. economy.
While insisting that the American economy is “still solid . . . as of now,” he conceded that “there are really the first signs of erosion at the edges, especially in manufacturing” industries. And he acknowledged that the global financial system is under increasing pressure.
The central bank’s policy-setting Federal Open Market Committee is scheduled to meet Sept. 29 to consider whether to change its current targets for short-term interest rates, and it will meet again Nov. 17 and Dec. 22.
However, while panel members say they now are convinced that the global economic situation is a serious threat, many still view the Fed’s main job as ensuring that inflation remains low. They argue that it should not cut interest rates while wages are accelerating.
Greenspan’s testimony came as a new set of government statistics--and the Fed’s own regular nationwide survey--showed that the overall U.S. economy is continuing to expand at a moderate rate, despite signs of slowing in some industries and regions.
The Fed’s latest “beige book,” containing reports from each of its 12 districts, also shows continued tightness in the nation’s labor markets. It said that while there has been relatively little impact on prices, wages are beginning to rise more sharply.
The assessment was echoed in fresh statistics from a spate of government agencies showing that industrial production and business inventory levels remained flat--beyond the bounce-back that resulted from the end of the General Motors strike--while capacity utilization rose.
The hearings before the Banking Committee also reflected lawmakers’ anxiety about the market’s worries over the deteriorating situation in the global economy.
Committee Chairman James A. Leach (R-Iowa) told Greenspan bluntly, “I think it would be fair to say at this time there wouldn’t be any great criticism of the administration if there was a movement in the lower interest rate direction.”
Rubin also received a plea from several lawmakers that he and Clinton do more to sell Congress--and the American public--on a bill to provide an $18-billion line of credit to help replenish the lending resources of the International Monetary Fund.
Rep. Paul E. Kanjorski (D-Pa.) warned that with only three weeks before Congress adjourns, “it seems at this point it’s very important for our central banker and our secretary of Treasury to stand up and answer some very direct questions to the American people.”
Clinton has insisted that it is imperative for lawmakers to approve the IMF bill before they go home, but the measure has encountered opposition from Democrats and Republicans who complain that the 182-country IMF has mishandled the Asian financial crisis.
Greenspan said he believes the IMF “really requires a fundamental review in all of its aspects,” but warned that with the Asian crisis worsening, now would be a bad time to do that. “We need the structure of the IMF,” he said, “because that’s what we’ve got.”
Greenspan warned governments such as Malaysia, which hae sought to restrict the flow of foreign capital into their countries, that doing so would only hurt them in the long run by depriving them of the investment they need in order to grow.
Times staff writer Chris Kraul in San Diego contributed to this report.
