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To: Elwood P. Dowd who wrote (87428)	12/5/2000 12:47:23 PM
From: Night Writer	Respond to of 97611

It looks like Greenspan is going to call the dogs off. NW Greenspan says Fed must be alert for economic slowdown NEW YORK, Dec. 5 (UPI) -- Federal Reserve Chairman Alan Greenspan said Tuesday the central bank must be alert to the possibility that falling stock prices and rising credit spreads could prompt a dramatic slowdown in the nation's economy. In his address to the America's Community Bankers on "Business Strategies for Bottom Line Results," Greenspan said the economy had already slowed substantially from its breakneck pace last year and earlier this year, even though consumer confidence was still holding up pretty well. "Still, in an economy that already has lost some momentum, one must remain alert to the possibility that greater caution and weakening asset values in financial markets could signal or precipitate an excessive softening in household and business spending," the nation's top banker said in prepared remarks. Greenspan's comments come against the backdrop of a radical reassessment of U.S. economic risks in financial markets, which has substantially raised the expectations of cuts in interest rates in the months ahead to ensure the current economic slowdown does not turn into a recession. The Fed next meets to discuss interest rates in two weeks. While it is widely expected to leave short term rates unchanged at its upcoming policy meeting, some economists believe the central bank will shift its assessment of economic conditions away from concerns about overheating toward a more balanced view of economic risks that would include an acknowledgment of the risks of an excessive slowing. Such a move would open the door to rate cuts sometime next year. Greenspan said, "Recently, wariness about risk again has increased as default rates on less than investment-grade bonds have moved higher, debt downgrades have become more commonplace, and many high-flying dot-com ventures have collapsed." "More broadly, equity market analysts have been revising down their near-term profit forecasts -- with revisions occurring across a range of industries," he said. The head of the Fed said, "As a consequence, stock prices this year have given back some of the extraordinary gains posted in recent years, risk spreads have widened appreciably in markets for lower-rated long-term and short-term credits, and -- as I'll be discussing in more detail later -- banks report that they have tightened terms and standards on business loans." Greenspan said: "To be sure, our current circumstances are in no way comparable to those of 1998. Financial markets have continued to function reasonably well, and credit continues to flow, although admittedly with reduced availability to less-than-investment-grade borrowers and at interest spreads sufficiently elevated to press on profit margins of those lower-rated borrowers. "Both lenders and borrowers are reassessing their positions in light of an apparent uptick in domestic risks, but the palpable fear that dominated financial markets at the height of the crisis two years ago is not now in evidence," Greenspan said. At its last policy meeting on Nov. 15 Federal Reserve policy-makers voted to leave short-term interest rates unchanged for the fourth consecutive time. The FOMC, composed of Fed board members and regional bank presidents, left the key federal funds rate at 6.5 percent -- its highest level since January 1991. The central bank also left the symbolic discount rate at 6.00 percent. The central bank last changed rates back on May 16 by one-half percentage point to their highest level in 9 1/2 years in an attempt to contain the galloping U.S. economy. The Fed had been hiking the interest rate that banks charge each other for overnight loans in an effort to raise costs for all borrowers and to cool the economy that has expanded by more than 5 percent for three straight quarters. May's half-percentage-point increase was the largest in more than five years, and followed five quarter-point increases that has lifted the overnight bank rate from 4.75 percent just one year ago. The overnight rate has not been as high was 6.5 percent since January 1991 and the Fed had not hiked rates by a half-point since February 1995. The federal funds rate is the rate banks charge each other for overnight loans and sets the stage for most other short-term rates and ultimately influences long-term rates such as mortgage interest rates, credit cards and business loans. The discount rate is the rate banks pay to borrow money from the Fed to meet reserve requirements. The Fed controls monetary policy by changing interest rates and the amount of money in circulation. In theory and by law, the Fed is supposed to keep the economy at full employment while maintaining price stability. Raising interest rates often leads to increases in long-term rates that businesses and consumers pay. When interest rates rise, businesses cut back on expansion plans and consumers have less money to spend. The FOMC holds eight regularly scheduled meetings per year to direct the conduct of open market operations by the Federal Reserve Bank of New York in a manner designed to foster the long-run objectives of price stability and sustainable economic growth. The FOMC also establishes policy relating to system operations in the foreign exchange markets. The Fed will hold its final meeting of the year on Dec. 19. (c) 2000 UPI All rights reserved. -0- Copyright 2000 by United Press International.