Greenspan Raises Issue of Rate Cut
Tuesday June 3, 3:24 pm ET
By Tim Ahmann and Stella Dawson
WASHINGTON/BERLIN (Reuters) - Federal Reserve Chairman Alan Greenspan said on Tuesday it may be necessary to lower interest rates as "insurance" against deflation even though the U.S. economy appeared set to pick up.
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His comments three weeks ahead of the Fed's next policy gathering fueled a rally in the U.S. Treasury markets as investors saw the comments as raising the odds the Fed would cut rates to ward off the risk of a widespread drop in consumer prices.
"It is too early to get any real fix on the American economy in the period ahead," Greenspan told a conference on monetary policy in Berlin. "There are indications that we are stabilizing, and there is some indication of a return but it is at this stage not by any means clear."
Greenspan, who has argued that much of the economy's weakness in recent months was because businesses hunkered down as a U.S.-led war in Iraq approached, said signs of a pick up were limited but gains in financial markets augured well.
"The best that we can judge is that the acceleration has not yet begun even though obviously the marked moves of the stock market in recent weeks, and especially in the credit markets, are suggesting a fairly marked turnaround," he said.
While Greenspan expressed confidence the U.S. economy can deliver a modest rebound, he nevertheless held the door open to lower borrowing costs, stressing the economic toll deflation could exact and the low probability inflation would ignite.
"We have concluded ... inflation was not something of significance for the Federal Reserve to be concerned about, which means that we would be far more inclined -- as we have had over the last several years -- to be taking out insurance against economic weakness," he said.
"The reason why you are hearing a good deal about the deflation issue is that we perceive that as a low probability ... but the cost of addressing it is very small indeed," the Fed chief said.
Anthony Karydakis, an economist with Banc One Capital Markets in Chicago, called Greenspan's remarks "cautiously upbeat," but said they kept alive the possibility the Fed could add to the string of 12 rate cuts since early 2001 that has brought borrowing costs to a 1961 low of 1.25 percent.
"He's keeping his options open," Karydakis said. "He clearly doesn't believe the case has been made for another ease yet."
REASONS FOR HOPE
Greenspan said the $350 billion tax-cut package President Bush signed into law last week would offer a sizable boost to consumers' after-tax income in the third quarter.
"Even though I argued that I don't like fiscal policy for short-term stimulus ... I have to admit that fortuitously this particular cut in taxes is happening at the right time," he said.
He also said gains in productivity -- worker output per hour -- are continuing. While those gains have helped businesses shore up profits, they have restrained jobs growth. But Greenspan noted forecasters were looking for employment to begin rising modestly soon.
"I do expect growth to quicken, maybe not as much as some expect, but everything seems to be in place," he said.
While Greenspan showed no sign his faith that the economy would accelerate when the cloud of war dispersed had been shaken, he said it was important for policymakers to consider what the costs might be if their forecasts were wrong.
"The more important question that is involved here is not whether you are worrying about something but how you appraise various sets of probabilities and more specifically how you adjust policy," he said.
Greenspan said the question for policymakers was: "What are the consequences if you are wrong?" |
