Jeff relief is in sight. The Fed next meets to debate interest rates is on Nov. 17, his indicating will see a cut sooner.
Greenspan signals Fed may cut rates again
By Knut Engelmann
WASHINGTON, Oct 7 (Reuters) - Federal Reserve Chairman Alan Greenspan on
Wednesday raised the prospect of further cuts in interest rates to keep
the U.S. economy on track in the face of a looming credit crunch
triggered by global financial turmoil.
Greenspan told an economists' group the Fed was virtually certain the
U.S. economy would slow from its still-solid pace, particularly because
lenders appeared to be holding on to their purse strings in the face of
increasing economic uncertainty -- thus depriving even viable companies
of much-needed capital.
''We are clearly facing a set of forces that should be dampening demand
going forward to an unknown extent,'' Greenspan told the National
Association for Business Economics. ''This is a time for monetary policy
to be especially alert.''
Analysts read Greenspan's remarks as indicating the Fed's readiness to
continue cutting rates to both prevent an economic crash and boost
liquidity levels in jittery capital markets.
The Fed last week cut its key short-term interest rate by a modest
quarter-percentage point to 5.25 percent to cushion the effects of a
global financial crisis on the U.S. economy. But many in financial
markets deemed the cut insufficient to fend off the economic slump that
has hurt many parts of the world.
''He's certainly opened the door to another rate cut,'' said Diane
Swonk, economist at First Chicago NBD, after listening to the speech,
adding that the Fed would need to monitor events as they evolve and
react to them as warranted.
The Fed next meets to debate interest rates on Nov. 17, but some Fed
watchers read Greenspan's forthright speech as opening the door to a
possible rate move even before that -- a highly unusual step which the
Fed has not taken since 1994.
John Silvia, chief economist at Scudder Kemper Investments Inc. in
Chicago, said such a move could not be ruled out.
''What he's telling us is that we don't know what it is going to take to
keep the economy moving ahead. Because of all these unknowns, there's a
lot more of a possibility of an inter-meeting move,'' he said.
Greenspan's comments briefly helped to boost the prices of
inflation-sensitive bonds which had suffered losses overnight. Key U.S.
stocks also traded higher.
Greenspan said a ''marked shift in investor psychology away from risk
and toward liquidity and safety has exacerbated the problems in foreign
markets, where deflationary forces remain virulent'' and had spread to
U.S. financial markets.
''It is pretty obvious that the outlook for 1999 for the U.S. economy
has deteriorated measurably,'' he warned.
While insisting that a full-blown credit crunch was still a distant
danger, Greenspan recounted U.S. companies' mounting problems to raise
capital because scared lenders preferred to hold on to their cash -- to
an extent that he had not seen in some 50 years of looking at the
economy on a daily basis.
''This risk aversion is showing up as increases in equity premiums and
the cost of capital for capital investment,'' Greenspan said.
Describing the situation in the U.S. economy as ''fluid,'' he added:
''We do not know how far it will go, or how much it will affect consumer
and business spending here at home.''
Most forecasters -- including the International Monetary Fund and the
National Association for Business Economics -- expect the U.S. economy
to grow by little more than two percent in 1999, after growing by an
estimated 3.5 percent this year.
For now, Greenspan acknowledged the domestic economy was still in good
shape and labor markets still unusually tight.
''The truth of the matter is we've got an economy which as of now...is
really still quite an impressive sight,'' he said, even though he
acknowledged that the manufacturing sector had been hit by falling
exports and rising imports from Asia.
Greenspan's overall tone represented a major shift from only a few
months ago when most Fed officials warned repeatedly against economic
overheating caused by excessively tight labor markets and urged banks to
tighten up lax lending standards.
The Fed chairman acknowledged as much: ''I had argued quite extensively
over the last two or three years that the markets were becoming too
complacent about risk. Well, that has changed. If there was a dime to
turn on, it did.'' biz.yahoo.com
Regards,
R.T |
