Greenspan to Testify Amid Signs of Cut

Federal Reserve Board Chairman Alan Greenspan will testify before Congress today amid growing signs that he might propose cutting interest rates when Fed policymakers meet Tuesday.

Although many economists and corporate executives have called for a rate cut in recent weeks to offset the economic turmoil in Asia and Latin America, few thought one could come so soon, especially after Greenspan said last week that no coordinated global rate cut was in the works.

One important signal of the apparent shift in the Fed’s thinking came Tuesday, when William J. McDonough, president of the New York Federal Reserve Bank, indicated he is leaning in the direction of cutting rates. McDonough’s views on monetary policy almost always mirror those of Greenspan.

“I can assure you that as I go into that meeting, I will continue to be very aware of potential weakness in our economy,” McDonough said in London.

“The balance of risk has shifted from one of concern about inflation to concern about inadequate growth,” McDonough said. “The anecdotal evidence regarding investment plans, regarding reductions in the labor force and the beginnings of a reduction in consumer confidence all add up.”

Expectations of a rate cut were widespread after Greenspan spoke at UC Berkeley on Sept. 4. Later, a speech by President Clinton and a statement by deputy finance ministers of major industrial nations appeared to point to a coordinated cut by those countries’ central banks. But last week Greenspan said no such coordinated cut was in the works, and many traders and analysts interpreted that denial as an indication that the Fed wasn’t going to act on its own.

The financial markets have been unusually volatile in response to the changing expectations of Fed action during the last two weeks. In the past, Greenspan has almost always sought to prepare financial markets when a change in interest rates has been in the offing.

Monday, the Fed chairman accepted an invitation from Senate Budget Committee Chairman Pete Dominici (R-N.M.) to appear before his committee today.

Those outside the Fed who favor a rate cut argue that it is necessary to shore up shaky world markets and take pressure off countries such as Brazil, where an outflow of capital threatens to leave the government unable to repay its debts. Lower U.S. rates could weaken the dollar, making it easier for foreign borrowers to repay dollar-denominated debt.

Fallout from severe economic problems in several East Asian nations has cut into U.S. economic growth by reducing demand for exports. A Fed rate cut would be expected to bolster growth by lowering borrowing costs for U.S. businesses and consumers.

A rate reduction might also help stabilize U.S. stock prices, which have declined more than 15% since mid-July. That drop is one reason consumer sentiment has fallen, which could lead to a cutback in household spending and sharply slower economic growth.