Greenspan Says Fed Is Ready If Rate Cuts Are Needed
Wednesday February 28 01:00 PM EST
By DAVID STOUT The New York Times
Federal Reserve Chairman Alan Greenspan said today that the country must hunker down a while longer, until the current slowdown has run its course and that the Federal Reserve Board is ready to take action if necessary.
WASHINGTON, Feb. 28 — Federal Reserve Chairman Alan Greenspan told the country today that it must hunker down a while longer, until the current slowdown has run its course. And he made it clear that the Federal Reserve Board is watching the situation closely, no doubt ready to take action if necessary.
Mr. Greenspan testified before the House Financial Services Committee, but as always his message had a much wider audience. The chairman is acutely aware that financial markets hang on his every word, so his words today were full of caveats and qualifiers.
For the time being, he told lawmakers, "downside risks predominate," even if the outlook for long-range prosperity remains strong.
As he has before, the chairman touched on a paradox running through this era of plenty. Much of the economic boom (the current slump notwithstanding) has been driven by advances in technology.
This technology, besides creating a lot of economic activity in itself, has enabled business people to detect market slowdowns earlier, allowing them to cut back on production more quickly. This is a good thing in the sense that companies are less likely to get stuck with huge inventories of goods — but an unsettling thing, in that widespread changes in the economy are apt to be more abrupt and thus rattle consumer confidence.
"Economic policymaking could not, and should not, remain unaltered in the face of major changes in the speed of economic progress," Mr. Greenspan said. "Accordingly, to foster financial conditions conducive to the economy's realizing its long-term strengths, the Federal Reserve has quickened the pace of adjustment of its policy."
That was a reference to the Fed's January cutting of interest rates by a full percentage point, and a hint that it is ready to trim rates again, perhaps even before its next meeting on March 20. "Even after the policy actions we took in January, the risks continue skewed toward the economy's remaining on a path inconsistent with satisfactory economic performance," Mr. Greenspan said.
Mr. Greenspan's speech can by read on the Fed's web site .
Economists who closely track Mr. Greenspan's remarks said that his words today revealed more concern about the state of the economy than was evident in a recent appearance before a Senate committee.
"He is more worried today then he was two weeks ago and he does feel the economy's problems will continue on longer than he previously thought and more action on his part is necessary in terms of lowering interest rates," Mark Zandi, chief economist for Economy.com, a consulting firm, told The Associated Press.
Mr. Zandi told the A.P. it was unclear whether the Fed will cut interest rates before its next meeting on March 20, as Wall Street investors hope, or wait until the meeting to do so. Still, Mr. Zandi said another half-point rate cut is on the way.
Wall Street apparently found little guidance in Greenspan's remarks. After the first hour of trading, the Dow Jones industrial average was down 22 points and the Nasdaq index was up 7 points.
As he did in his Senate appearance, Mr. Greenspan spoke of the great intangible factor: how Americans feel about the economy, as opposed to what the indicators say.
"This unpredictable rending of confidence is one reason that recessions are so difficult to forecast," he said. "They may not be just changes in degree from a period of economic expansion, but a different process engendered by fear. Our economic models have never been particularly successful in capturing a process driven in large part by nonrational behavior.
"For this reason, changes in consumer confidence will require close scrutiny in the period ahead, especially after the steep falloff of recent months."
Mr. Greenspan defended the rate increases he thought seemed so appropriate not many months ago, when the economy was going full-speed ahead and the Fed worried it might derail itself. "some slowing in the pace of spending was necessary and expected if the economy was to progress along a balanced and sustainable growth path," he said.
But he added, "The adjustment has occurred much faster than most businesses anticipated, with the process likely intensified by the rise in the cost of energy that has drained business and household purchasing power."
Mr. Greenspan got a friendly and respectful reception before the panel, with kind words from the chairman, Representative Michael G. Oxley, Republican of Ohio, and the ranking Democrat, John LaFalce of Buffalo, who called the chairman "maestro."
Representative Carolyn B. Maloney, another New York Democrat, was also friendly to the chairman. But she could not resist a mild dig. "With all respect to Chairman Greenspan, the Fed's recent actions have shown just how difficult it can be to forecast the economy," she said. "The Fed may have contributed to the current economic slowdown by raising interest rates six times from June of 1999 to May of 2000." |
