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To: Susan G who wrote (58)	12/5/2000 8:05:25 PM
From: Susan G	Respond to of 5732

Greenspan Warns of Risks of Slowdown By Svea Herbst-Bayliss Dec 5 5:02pm ET NEW YORK (Reuters) - Federal Reserve Chairman Alan Greenspan said on Tuesday the U.S. economy is cooling markedly in a signal to investors the central bank may soon be ready to cut interest rates for the first time in over two years. Financial markets, already fairly sure the Fed would need to cut rates next year, sprinted higher with the Nasdaq soaring over 10 percent as dealers cheered brightening prospects of cheaper credit ahead. Greenspan said the Fed was watching the economy's transition to a less inflationary pace of growth as stock prices were falling and financial market conditions tightening. His remarks indicated the Fed no longer views higher inflation as the prime threat to the U.S. economy -- a marked shift for the central bank which has been steadily tightening the monetary reins since June of last year to slow breakneck growth and stamp out inflationary pressures. Now Greenspan, in his most extensive discussion of the building economic slowdown to date, signaled the gears have shifted. ``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,'' Greenspan told a group of community bankers. Economists said his remarks confirmed market thinking of the past week that the U.S. economy has slowed significantly. ''His sense seems to be that the downside risks now outweigh the inflation risks,'' said David Resler, chief economist at Nomura Securities in New York. In separate speeches, Federal Reserve Bank of Chicago President Michael Moskow also said the economy is slowing but he did not see significant risk of a U.S. recession while Robert Parry, president of the Federal Reserve Bank of San Francisco, said growth had shifted to a more sustainable range. Parry will be among those voting when Fed policymakers next debate interest rates in two weeks. In further evidence of the ratcheting down in U.S. growth, the Commerce Department said on Tuesday that orders for new factory goods fell in October by 3.3 percent to a seasonally adjusted $373.9 billion after climbing 1.1 percent the prior month. This added to a picture of a significant slowing painted by the National Association of Purchasing Management, which last Friday said the the manufacturing sector contracted for the fourth straight month. The government said recently that the massive U.S. growth engine had slowed to a 2.4 percent annual rate in the third quarter, down from its breathless 5.6 percent in the second quarter, while a private research group said consumer confidence dropped to its lowest levels in over a year. Markets now are waiting for the November employment numbers on Friday to see how sharply the economy is contracting and whether the inflationary pressures from a tight labor market, where unemployment is hovering at 30 year lows around 3.9 percent, are easing. Greenspan hinted that relief may be in store, saying in his speech that the recent uptick in weekly claims for unemployment benefits may be ``an early harbinger of an easing of these conditions.'' To slow the nation's robust growth rates, running at more than 8 percent late last year, the Fed has pushed the federal funds rate up 1.75 percentage points to 6.50 percent in six separate moves between June 1999 and May 2000. Up until now, Fed policymakers have warned that the risks of inflationary pressures outweigh the dangers of a sharp slowdown. But economist said Greenspan's remarks shows the Fed will formally change that stance at its next policy-setting meeting on Dec. 19. ``Greenspan is telegraphing that the (rate tightening) bias will go on Dec. 19. In fact it would be amazing if they did not scrap the bias at that time after he delivered this speech,'' said Dana Johnson, chief economist at Banc One Capital Markets in Chicago. That view is now unanimous on Wall Street. In a Reuters poll conducted after Greenspan's speech, 25 of the 26 primary dealers who deal directly with the central bank in the money markets, said they expect the Fed, at its next meeting, to shift from warning about inflationary risks to saying risks are evenly balanced. One dealer declined to give a forecast. And 17 out of the 25 dealers said they expect the Fed to cut rates at least once by mid-2001. Analysts said it may take some time for an interest rate cut to appear. ``Greenspan's speech doesn't imply, however, that the Fed is going to ease, just that they are more prepared to ease than they have been in the past,'' Chase Securities international economists Chris Widness said.