Greenspan Says He Sees the Start Of Likely Weak Recovery in U.S.
By GREG IP
Staff Reporter of THE WALL STREET JOURNAL
WASHINGTON -- The economic recovery appears to have begun, but it's likely to be weak with little risk of stoking inflation, Federal Reserve Chairman Alan Greenspan said Wednesday, suggesting that interest rates aren't about to rise anytime soon.
In congressional testimony, Mr. Greenspan skillfully wove optimism about imminent recovery and firm consumer spending with caution about high household debt, eroded wealth and weak capital spending. The net result was to reassure investors that the recession was probably over but that a boost in interest rates isn't imminent. Stocks initially jumped on his remarks; in the futures market, investors lowered the odds the Fed would raise rates by June to 32% from 48%.
"The typical dynamics of the business cycle have re-emerged and are prompting a firming in economic activity," Mr. Greenspan said. "An array of influences unique to this business cycle, however, seems likely to moderate the speed of the anticipated recovery."
Mr. Greenspan also said Enron Corp.'s collapse hasn't had a significant impact on the economy. Such sudden failures, he said, are more likely in an economy that is increasingly built on "conceptual" rather than physical capital. He endorsed making corporate officers more responsible for the quality of financial statements, but expressed skepticism that increased director independence would help.
Last year, the Fed slashed its short-term interest-rate target from 6.5% to a 40-year low of 1.75% as the economy slid into recession. But with signs of stability emerging, Fed policy makers decided at their Jan. 30 meeting to leave rates alone. The Fed will almost certainly have to reverse those cuts and push rates back to a more neutral level eventually. But Mr. Greenspan's testimony gave little sign he was laying the groundwork for such a move.
By stating after its last meeting that risks were still weighted toward economic weakness, the Fed "indicated that until the dynamics of sustained expansion are more firmly in place, it remained concerned about the possibility of weak growth for a time, despite the very low level of the federal-funds rate," Mr. Greenspan said. The central-bank chief -- and Fed Vice Chairman Roger Ferguson in a separate speech -- continued to emphasize business investment as a big continuing concern. Although capital-goods orders have picked up, "we need a good deal more time to see this recovery is taking shape in an integrated form," Mr. Greenspan said in response to a question.
That caution was reflected in forecasts of Fed governors and regional-bank presidents in the Fed's monetary-policy report submitted to Congress Wednesday. It said that "the economy faces considerable risk of sub-par economic performance in the period ahead." Policy makers are generally expecting inflation-adjusted gross domestic product to grow at an annual rate of 2.5% to 3% by the fourth quarter of this year, considerably less than in previous recoveries.
Although Mr. Greenspan's testimony suggested the Fed sees no imminent need to raise rates, that could change quickly. Recent economic reports have generally been stronger than expected, and private economists keep boosting their growth forecasts (See related article). Furthermore, some of Mr. Greenspan's fellow policy makers are concerned that leaving rates at current low levels could fuel inflation down the road. Indeed, some went along with December's rate cut on the understanding it could be quickly reversed, if need be, minutes to that meeting show.
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That rate also appears to be below what Fed officials consider the economy's long-term potential growth rate, meaning GDP growth won't keep up with the growth of available workers or strain the economy's productive capacity. As a result, the unemployment rate is expected to rise to between 6% and 6.25% from 5.6% in January. Inflation, measured by the index of personal consumption expenditures, will remain tame at 1.5%, they predicted.
Commenting on Enron, Mr. Greenspan endorsed making corporate management personally liable for the accuracy of their firms' financial statements. Treasury Secretary Paul O'Neill has suggested barring chief executive officers and directors from having insurance against liability arising from misleading financial statements, and lowering the bar on disciplinary action against them. Mr. Greenspan said: "I fully support" shifting "the onus of decision-making with respect to a whole series of corporate-governance questions ... to the CEO."
Mr. Greenspan blamed the Enron issue in part on the failure of accounting rule makers in the early 1990s to force companies to treat stock options as compensation expense. That added three percentage points a year to reported profit growth in the late 1990s, and encouraged companies to "game the accounting system in a manner to create the perception of short-term earnings growth, which would be confused with long-term earnings growth."
Mr. Greenspan also agreed with Republican Rep. Richard Baker of Louisiana, who said the federal government should examine whether CEOs should be allowed to profit from exercising low-cost options to sell stock inflated by misleading accounting. Securities and Exchange Commission Chairman Harvey Pitt already has suggested that executives might have to surrender such profits.
Write to Greg Ip at greg.ip@wsj.com
Updated February 28, 2002 |
