GREENSPAN says risk of weakness remains; rate cut possible

Wednesday, July 18th 2001, 12:00 am
By: News On 6

WASHINGTON(AP) _ Federal Reserve Chairman Alan Greenspan on Wednesday cautioned that the yearlong economic slowdown has not ended and may require another interest-rate reduction to revive sluggish growth.

``The period of subpar economic performance ... is not yet over, and we are not free of the risk that economic weakness will be greater than currently anticipated and require further policy response,'' Greenspan said in his twice-a-year report on the economy.

In an effort to stave off recession, the Federal Reserve has slashed interest rates six times this year, totaling 2.75 percentage points, the most aggressive credit-easing campaign in nearly two decades.

Economists viewed Greenspan's remarks as sending a strong signal that another interest rate cut could come as soon as the Fed's next meeting on Aug. 21.

``I think that he was a bit clearer today in expressing concern about the potential for continued weakness for the economy than he typically is and that he is holding up a flag _ he is telling everybody he is absolutely prepared to do all that is necessary to make sure things don't get any worse,'' said economist Joel Naroff of Naroff Economic Advisors.

Greenspan, in testimony to the House Financial Services Committee, expressed hope that the Fed's rate reductions along with falling energy costs and soon-to-be mailed tax-rebate checks will bolster economic growth in the coming months.

``By aggressively easing the stance of monetary policy, the Federal Reserve has moved to support demand, and, we trust, help lay the groundwork for the economy to achieve maximum sustainable growth,'' Greenspan said in his prepared testimony.

Despite risks to the economy, Greenspan said, there is a new glimmer of hope. ``There is the first sign that something of a positive nature seems to be developing,'' he said. Economic indicators that were uniformly negative ``have now turned mixed.''

Greenspan, declaring the rate of decline is clearly slowing, said he expects the economy to improve toward the end of the year.

One of the reasons the Fed has been able to cut interest rates so much, Greenspan said, is because inflation is well contained. That should continue, given that energy prices are starting to fall.

Still, ``Uncertainties surrounding the current economic situation are considerable,'' he said.

Greenspan's words are typically awaited with anxiety and anticipation. Decisions that he and the Fed make in terms of directing monetary policy substantially affect the lives of people, from would-be home-buyers and investors to people seeking jobs or trying to borrow for a college education.

Stocks plunged Wednesday. The Dow Jones industrial average dropped 65 points in the first three hours of trading and the Nasdaq index was down 47 points.

Some economists said Greenspan's tone was a bit more dour than they expected and that the market was reacting to that. ``I think what was expected was a little more balanced approach. His tone is a little more negative than most people expected at this particular point. The markets are worried the expected turnaround will take longer than they hoped,'' Naroff said.

Before Greenspan testified, the government reported that the consumer price index, a closely watched inflation gauge, rose 0.2 percent in June, while the costs of gasoline and other energy products retreated. However, electricity prices posted a record rise. Housing construction, a pillar supporting the economy, posted a strong 3 percent increase, another report showed.

``There's very little inflation in our economy,'' Greenspan told the hearing. ``At the moment, I see now evidence of it.'' Yet, he said Fed policy-makers must be vigilant to price pressures.

Until there is more evidence that businesses have successfully completed getting their excess stocks in line with sales and companies ramp up investment in computers and other equipment, ``The risks would seem to remain mostly tilted toward weakness in the economy,'' Greenspan said.

Much of the economic slowdown comes from businesses rapidly and sharply cutting back on production in the face of sagging demand.

Economic upheaval in other countries, coupled with rising energy prices last year into this year, intensified the slowdown and drained businesses' and consumers' purchasing power, Greenspan said.

Answering questions at the hearing, Greenspan said he did not believe financial turmoil in Argentina would affect the U.S. economy. The risk of Argentina's problems spreading to this country ``is not very large at this particular point ... and I don't expect it to become very large,'' Greenspan said.

Greenspan did not predict when businesses would complete the paring of inventories.

``At some point, inventory liquidation will come to an end, and its termination will spur production and incomes,'' he said.

Economists say once companies work off excess inventories, they will be in a position to rev up production, which would bode well for a rebound in economic growth.

Consumers, whose spending accounts for two-thirds of all economic activity, have been a main force keeping the economy afloat. Household disposable income, Greenspan said, is now being bolstered by President Bush's new tax cuts.

Yet, there are downside risks to consumer spending in the next few quarters, he said. The sagging stock market has reduced household wealth and is likely to restrain consumer spending in the future. A weaker labor market also could damp spending.