ECON - Greenspun offers upbeat tone

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Monday July 16 4:56 PM ET

Greenspan Seen Offering Upbeat Tone on U.S. Economy

By Caren Bohan

WASHINGTON (Reuters) - Federal Reserve Chairman Alan Greenspan's key address to Congress this week is expected to be marked by optimism that the slumping U.S. economy is stabilizing and poised to rebound later in the year.

In his semiannual testimony on monetary policy, Greenspan is expected to reiterate a belief that he has stated in previous public appearances, that inflation is well under control and is unlikely to prevent the Fed from doing what it needs to do to keep the U.S. economic expansion on track.

But promises -- tacit or otherwise -- of further aggressive interest rate cuts are likely to be absent from the testimony, even though Greenspan will emphasize that the economy remains at risk of further weakness, analysts said.

Many said that while the U.S. central bank may ratchet interest rates a little bit lower in the coming months, it will proceed cautiously as it waits to see how much kick the U.S. economy gets from the six reductions in borrowing costs that have already been implemented.

``I think we are pretty close to where we need to be in terms of monetary policy,'' said Mark Zandi, chief economist at Economy.Com in West Chester, Pa. ``Greenspan will probably leave us with a more positive tone with respect to the economy but he will continue to highlight the risks.''

Greenspan's formal testimony, along with the Fed's forecasts for economic growth and inflation, will be released at 10 a.m. EDT (1400 GMT) on Wednesday.

He will also field questions from lawmakers on the House of Representatives Financial Services Committee, to which he is delivering the first leg of his monetary testimony.

Round two of the testimony will take place on July 24, before the Senate Banking Committee.

LET THE RATE MEDICINE KICK IN

In one of the most dramatic series of rate-reductions in history, the Fed has slashed overnight interest rates six times since the beginning of the year, with its moves totaling 2.75 percentage points.

The federal funds overnight lending rate now stands at 3.75 percent. Many analysts said it was unlikely the Fed would bring it much lower than 3.5 percent or 3.25 percent.

Economists estimate that it takes a minimum of six to nine months for rate moves to show their effects on the economy, so much of the impact of the Fed's cuts is still months away.

The Commerce Department will not issue gross domestic product data on the recently ended second-quarter until later this month. But monthly reports paint a picture of an economy that is lackluster but probably still growing.

Factories remain in a deep recession, with makers of high-technology equipment particularly hard-hit.

But U.S. consumers, who continue to shell out money for big-ticket purchases like homes and cars, are a key force in helping to drive the expansion forward.

Last week, Commerce said sales at U.S. retail stores grew 0.2 percent in June after a 0.4 percent gain in May. While that was not a great showing, it indicated that consumer spending -- which drives two-thirds of GDP -- held up decently in the second quarter.

Sales of both new and existing homes rose strongly in May, the latest month for which data are available.

``We clearly see signs that the economy is beginning to stabilize,'' said Mickey Levy, chief financial economist at Bank of America Securities.

Levy said that when Greenspan delivers his testimony, he will be particularly keen to see how quickly the Fed chief expects the economy to rebound and how he characterizes inflation.

In recent public appearances, including testimony to a banking hearing on June 20, Greenspan has described inflationary pressures as contained.

But for his part, Levy said the risk of an inflation pickup as the economy rebounds is something that will merit the Fed's focus in coming months and it will need to be careful to avoid overdoing on interest-rate cuts.

But economist Kurt Karl at Swiss Re said that even if the economy is stabilizing, a rebound may be three to six months away, leaving room for the Fed to possibly bring overnight rates down toward 3 percent.

Karl said Greenspan faces two key tasks in his testimony on Wednesday: ``He has to reassure the financial markets that inflation is not a worry. He also has to reassure consumers, who are the ones keeping us out of recession, that the Fed stands by and is ready to help out as needed.''

-- Anonymous, July 16, 2001


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