Fed chairman signals lower interest rates if necessary

Tuesday, December 5th 2000, 12:00 am

By: News On 6

WASHINGTON (AP) _Federal Reserve Chairman Alan Greenspan, expressing concerns about potential threats to the slowing U.S. economy, sent a strong signal Tuesday that the central bank stands ready to cut interest rates if necessary to ward off a recession.

Greenspan's comments triggered a huge rally on Wall Street as investors took comfort that the central bank was growing concerned about the threats to the overall economy from a sharp sell-off in stock prices.

The Dow Jones industrial average, which had been up about 180 points before Greenspan started speaking, shot higher and was up more than 300 points at midday.

Greenspan's concerns about the slowing economy followed remarks in recent days by George W. Bush and his running mate, Dick Cheney, that recent signs of economic weakness pointed up the need for the Republicans' $1.3 trillion tax cut.

In his speech on economic dangers, Greenspan specifically mentioned the sharp plunge in stock prices and the possibility this could cause a cutback in consumer and business spending. He also said rising tensions in the Middle East could cause oil prices to surge unexpectedly.

Greenspan's remarks, delivered to a banking conference in New York, were the firmest signal yet that the central bank is switching its chief concern from fighting inflation by raising interest rates to worrying that its credit tightening has gone too far and could prompt an outright recession.

``In periods of transition from unsustainable to more modest rates of growth, an economy is obviously at increased risk of untoward events that would be readily absorbed in a period of boom,'' Greenspan said.

The Fed has raised interest rates six times, beginning in June 1999, in an effort to slow the booming economy to a more sustainable pace in order to keep inflation in check.

Responding to those rate increases, economic growth slowed abruptly to an annual rate of just 2.4 percent in the summer, less than half the sizzling 5.6 percent pace of the spring.

That slowdown dampened corporate profits and contributed to a sharp sell-off in the stock market this fall, particularly for high-flying technology companies.

Recently, more economists have begun expressing fears that the central bank has overdone the credit tightening and could be running a danger of ending the current record-long economic expansion, now in its 10th year.

Many analysts believe the Fed, at its next meeting Dec. 19, will recognize those concerns by moving its policy statement from one leaning toward further rate cuts to a neutral stance, indicating it is as likely in coming meetings to cut rates as to raise them.

Economists believe that the Fed will not actually cut rates at the December meeting and may remain on hold for some months to come unless the economy threatens to stall out.

Greenspan's remarks on Tuesday to the America's Community Bankers Conference signaled that he has apparently signed on to moving the policy statement to a neutral stance.

Talking about the impact that the fall in stock prices could have on the real economy, Greenspan said it was essential to remain alert to the possibility that falling stock prices ``could signal or precipitate an excessive softening in household and business spending.''

Greenspan's remarks indicated he believes the economy has shifted into a lower gear and the third quarter was not just a temporary pause likely to be followed by a rebound that would bring back inflation concerns.

At one point, he talked about ``the economy's transition to a more sustainable balance in the growth of demand and supply.''

One of the primary reasons the Fed has given for its six rate increases was concern that the demand for workers was outstripping the supply because of an unemployment rate that has fallen to a three-decade low of 3.9 percent.

While labor markets remain tight, Greenspan said the rise in new claims for unemployment benefits in recent weeks ``may be an early harbinger of an easing'' of hot labor market.

Despite his concerns, Greenspan stressed that the current situation is not like the turbulence of 1998 when a burgeoning Asian crisis and Russian default on its bonds plunged U.S. and global financial markets into a tailspin. At that time, the Fed responded with three rapid rate cuts to restore calm.

He said the decline in stock prices meant they had ``given back some of their extraordinary gains posted in recent years'' as investors adjusted to lower earnings expectations. Since 1996, Greenspan has been expressing worries that ``irrational exuberance'' might be pushing stock prices beyond what could be justified.

On oil, Greenspan said so far the sharp rise in prices has provided ``little evidence of the type of destabilizing inflationary pressures'' that occurred in the oil price shocks of the 1970s and 1980s.

But he cautioned that ``Middle East tensions have heightened such risks.'' The central bank will have to be on guard against repeating mistakes of the 1970s, when it provided too much money to cushion the shock of the oil increases and ended up fueling a decade-long bout with inflation, Greenspan said.