Greenspan Advises Patience


Federal Reserve Chairman Alan Greenspan acknowledged Wednesday that the U.S. economy was not snapping back as quickly as he had thought it would, but suggested there was little more the central bank was prepared to do at the moment to reverse the slowdown.

Greenspan included a standard-issue promise to cut interest rates further if growth continued to flag. But he strongly hinted that any further cuts would be small. He suggested that the country needed to give the Fed's previous cuts enough time to take effect.

The Fed's Open Market Committee has cut its key short-term interest rate by 2.75 percentage points, to 3.75%, since January in one of the swiftest and steepest rate reductions in the central bank's history. Rate cuts usually take six to nine months to have a substantial effect on the economy.

Greenspan pushed back the date he expected the economy to begin reviving in earnest until the end of the year, and predicted that growth for 2001 as a whole would be a meager 1.25% to 2%. That's less than the 2% to 2.5% growth rate he forecast earlier this year, and drastically less than the 5% rate of 2000.

"The period of sub-par economic performance is not yet over," Greenspan told the House Financial Services Committee in his semiannual testimony on the state of the economy. "We are not free of the risk that economic weakness will be greater than currently anticipated, and require further policy response."

Investors reacted to Greenspan's testimony and to a string of disappointing corporate profit announcements by driving down stock prices. The technology-laden Nasdaq composite index dropped 51.15 points, or 2.5%, while the Standard & Poor's 500 index fell 0.6% and the Dow Jones industrial average, 0.3%.

In the bond market, investors drove up the price of U.S. Treasury securities in anticipation of further Fed rate cuts. The 10-year Treasury note increased three-quarters of a point, pushing its yield or market interest rate down 0.11 of a percentage point to 5.09%.

Greenspan sought to put the best face on current conditions, saying that consumers are continuing to buy houses and cars, inflation remains low and the worst signs of weakness are starting to abate.

"I think that we are seeing signs that the bottom is beginning to structure itself," he said in answer to a question. "It's still tentative, and, clearly, the risks are toward economic weakness.

"But . . . the rate of deterioration is slowing," he added.

However, the Fed chairman said he continued to worry about the nation's corporate sector, which, in contrast to past periods of economic trouble, has been the moving force behind the current slowdown.

In a comment that particularly worried some observers, Greenspan said that corporate problems the central bank had previously indicated were solved may not yet be. Chief among them: inventories.

The Fed has repeatedly said in recent months that manufacturers such as auto makers speedily reduced their inventories early this year when they realized growth was slowing. Inventory reduction is important because the economy can't stage a comeback until firms are convinced they can begin producing again without fear of being stuck with unsold goods.

But Greenspan said Wednesday that the inventory reduction process was still very much underway. "The evidence suggests that inventories are still declining; the rate of liquidation, while it has slowed some, is still adjusting," he told lawmakers.

He said that in some hard-hit areas, such as the telecommunications equipment industry, the adjustment process had barely begun. "We're only now beginning to see the inventory rise come to a halt," he said.

Greenspan also said that there were few signs yet of recovery in business investment in high technology, which drove much of the growth of the last few years. "Growth of investment in equipment and software has turned decidedly negative," he said.

The Fed chairman said the central bank continued to have the maneuvering room to cut rates because inflation remained firmly in check. But he appeared to be at least partially contradicted by a Labor Department report Wednesday that showed consumer prices rose more than expected in June.

The consumer price index, the government's broadest gauge of price trends, increased 0.2%, or double what analysts had predicted, largely because of big jumps in services prices, airline fares and medical costs. The June increase comes atop a 0.4% rise in May. So far this year, the index has been rising at a 3.8% annual rate.

Further price rises could complicate the Fed's efforts to keep the economy from recession by limiting how much it could speed growth without sparking a resurgence of inflation. But analysts said the problem was still contained.

"Sure, there are some things whose price is running away," said Richard Yamarone, chief economist of Argus Research Corp. in New York. "But you're not going to make monetary policy on the basis of what air fares are doing," he added.

Greenspan credited continued purchases by American households for keeping the economy from recession. As if to illustrate his point, the Commerce Department reported Wednesday that home construction jumped by 3% in June to a five-month high. The increase was the largest since housing starts surged 9% in January.

Greenspan predicted that the economy would resume a respectable 3% to 3.25% growth rate by next year. But because that still would be substantially slower than the 5%-plus pace of growth of recent years, he said the unemployment rate, now 4.5%, would climb above 5%.

The Fed's policymaking Open Market Committee next meets Aug. 21, and analysts are predicting it will trim an additional quarter of a point from the short-term interest rate it controls, bringing it to 3.5%. But most predict that that will be the central bank's final rate reduction in the current series--unless the economy takes a sudden turn for the worse.

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