Greenspan Leaves Door Open for Further Rate Cutsgreenspun.com : LUSENET : Unk's Wild Wild West : One Thread
Tuesday July 24 1:42 PM ET
Greenspan Leaves Door Open for Further Rate Cuts
By Barbara Hagenbaugh
WASHINGTON (Reuters) - The U.S. economy may not yet be out of the woods, Federal Reserve (news - web sites) Chairman Alan Greenspan (news - web sites) repeated on Tuesday, again leaving the door ajar for further interest rate cuts by the central bank.
But under questioning by members of the Senate Banking Committee, the powerful Fed chief sounded a more upbeat note, saying consumers were still confident about the economy. He also said falling energy prices were boosting corporate profits and putting more spending money into consumers' pockets.
In testimony that mirrored formal remarks he gave to a House panel last week, Greenspan noted economic indicators had turned from ``persistently negative to more mixed'' -- a positive development -- but warned there were still considerable risks to the U.S. economy.
``The period of sub-par 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 reiterated in prepared remarks.
``That weakness could arise from softer demand abroad as well as from domestic developments,'' he said. ``But we need also to be aware that our front-loaded policy actions this year coupled with the tax cuts under way should be increasingly affecting economic activity as the year progresses.''
Stock prices fell on Tuesday but investors were more focused on gloomy earnings reports and announcements of more layoffs at U.S. corporations than the Fed chief's comments.
Treasury prices, meanwhile, were steady as Greenspan's comments kept alive market hopes for another interest-rate cut next month.
MONETARY POLICY EFFECTIVE The Fed is widely expected to cut interest rates for the seventh time this year at its next policy-setting meeting on Aug. 21 in an effort to boost the flagging U.S. economy.
The economy grew at a mere 1.2 percent annual rate in the first three months of the year. That was an improvement from the 1.0 percent measured at the end of 2000 but about a third of the pace that most policymakers see as the economy's potential to expand without sparking inflation.
A report on second-quarter growth comes out on Friday. Economists polled by Reuters on average estimate the economy grew at a 0.9 percent annual rate in the three months ending in June, perhaps marking the lowest level of growth for the year.
Despite maintaining his warnings about downside risks to the economy, Greenspan assured senators that the Fed's interest rate actions in 2001 will come to the economy's aid.
``At the end of the day, it does seem to be effective,'' he said of monetary policy.
Some analysts have questioned recently whether rate changes are packing the same punch today they have in the past.
Greenspan also noted that the risks to the U.S. economy ''have changed'' since the Fed began cutting interest rates in January and said consumer confidence was holding up well.
``The fabric of consumer confidence has not been breached,'' Greenspan said.
The chairman and other Fed officials keep a close eye on confidence as consumer spending accounts for two-thirds of U.S. economic activity. The Fed chief said spending by consumers may also be stoked by a drop in energy costs which he said were ''opening up'' spending in other areas of the economy.
THINK LOCALLY, NOT GLOBALLY
Of the international scene, Greenspan said that, despite economic problems in several countries including Japan and Argentina, there was little chance of a repeat of the type of contagion that wreaked havoc in financial markets in the United States and in other countries during the Asian financial crisis of 1997-1999.
``The problems that we have seen are in one sense more domestic than they are international,'' Greenspan said. ``The tinder out there is much less than it was in 1997, there are very few fixed exchange rates problems, the extent to which debt was extended is much less, the reserves are better.''
He added that Argentina has significant problems but that authorities there are addressing those difficulties with little chance of contagion.
The somber tone of Greenspan's remarks last week was largely unexpected and solidified expectations the Fed would cut rates by another quarter-percentage point at its next meeting on Aug. 21.
During questioning on Tuesday, Greenspan said he did not see a near-term inflation threat, suggesting the Fed can be comfortable cutting rates without sparking a run-up in prices.
``All of our measures suggest fairly firmly that inflation is being contained,'' he said.
The Fed has cut rates this year by a total of 2.75 percentage points to assist the struggling U.S. economy. Overnight interest rates, which affect borrowing costs for consumers and companies across the economy, now stand at a seven-year low of 3.75 percent.
-- (M@rket.trends), July 24, 2001
MT, how long can Greenspan swing that sword and have it matter?
-- Carlos (email@example.com), July 25, 2001.