Greenspan: Economic Signals Still Mixed
Fed Chairman Underscores Deflation Threats
By MARTIN CRUTSINGER
AP Economics Writer
Wednesday, May 21, 2003; 9:40 AM
Federal Reserve Chairman Alan Greenspan told a congressional panel Wednesday that the economy is still sending mixed signals with some hopeful signs of stronger growth balanced against more disappointing results.
"The economy continues to be buffeted by strong cross currents," Greenspan said in testimony before the congressional Joint Economic Committee.
In his remarks, Greenspan continued to signal that, if necessary, the Fed was prepared to cut interest rates further to bolster economic growth.
He noted, as the Fed had at its meeting earlier this month, that at the present time "the probability of an unwelcome substantial fall in inflation over the next few quarters, though minor, exceeds that of a pickup in inflation."
That language tracked what Fed policy-makers said after their May 6 meeting when the central bank, in an historic shift, signaled that for the first time in more than a half century, they were more worried about the possibility of deflation - a prolonged period of falling prices - than in inflation. The country's last bout of deflation occurred during the Great Depression of the 1930s.
Greenspan told the committee that in the weeks since the Iraq war ended, the economy had not established any firm pattern.
"We do not yet have sufficient information on economic activity following the end of hostilities to make a firm judgment about the current underlying strength of the real economy," Greenspan said.
He said that while declines in energy prices immediately after the war were encouraging, with West Texas intermediate crude falling to below $26 per barrel, some of that decline was recently reversed with the price of crude oil rising to near $30 a barrel. That's because of indications of delays in restoring Iraqi crude production and various other geopolitical risks creeping back into market expectations.
He called this a "worrisome trend if continued" but noted that even at $30 per barrel, oil prices are still about $10 below the peak hit in February.
Many economists believe that the Fed's new worries about the possibility of deflation have increased the odds that the central bank will cut interest rates when policy-makers next meet June 24-25. Analysts believe the debate at that meeting may not be over whether to cut rates but how large of a rate cut to provide, either the normal quarter-point move or a larger half-point cut.
The last Fed rate cut occurred Nov. 6, when the Fed, worried about a developing "soft spot" in the economic recovery, cut rates by a half point. That reduced the target for the federal funds rate, the interest that banks charge on overnight loans, to a 41-year low of 1.25 percent.
Since then, Greenspan and other Fed officials have sought to reassure financial markets that they are not in danger of running out of tools to bolster economic growth even with interest rates at such low levels.
They have suggested that if necessary, the Fed will not hesitate to take a number of other steps, such as buying longer-term U.S. Treasury securities to influence interest rates.
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