Greenspan Cites Continued Spending
"But don't ordinary people pay more attention to White House comments and economic forecasts? …….
"I think that was true a number of years ago. But with cable television today, I'd say the answer to that
is probably no," Greenspan said.
By John M. Berry
Washington Post Staff Writer
Thursday, March 1, 2001; Page E01
Federal Reserve Chairman Alan Greenspan said yesterday that economic growth still "is effectively at
zero" but that consumers have continued spending despite a "steep falloff" in consumer confidence in recent months.
Greenspan told the House Financial Services Committee that the "exceptional" slowdown in economic
growth late last year "seemed less evident in January and February."
"For now, at least," he said, "the weakness in sales of motor vehicles and homes has been modest,
suggesting that consumers have retained enough confidence to make longer-term commitments."
There may be "a major difference between what consumers think, feel and say and what they do," he added.
But the Fed chairman also said the "risks continue to be skewed toward the economy's remaining on a
path inconsistent with satisfactory economic performance." And he indicated it is impossible to tell how
long it will be before growth picks up again. In the meantime, the unemployment rate is likely to rise above
the January rate of 4.2 percent, he said.
The Commerce Department reported yesterday that the economy grew at a 1.1 percent annual rate in
the fourth quarter of last year, slightly less than the 1.4 percent pace the department earlier estimated.
Many analysts expect growth to be around 1 percent again in the first three months of this year.
Greenspan's remarks clearly suggest that while he does not see a recession looming, he does anticipate
that the Fed will again lower its 5.5 percent target for overnight interest rates, most likely when central
bank policymakers meet March 20. His assessment of the economy was much less gloomy than many
investors and financial analysts had expected, and it makes it unlikely the Fed will cut interest rates before
that meeting.
Greenspan told the committee that Fed officials prefer to act at the meetings, but that they have shown
they will do so between meetings when it's necessary.
The Fed cut the target twice in January, by half a percentage point each time. Investors generally
expect the next cut to be the same size, whether it comes March 20 or sooner.
Given the sharp slowdown in economic growth, Rep. Barney Frank (D-Mass.) challenged Greenspan
on whether the Fed's three interest rate increases from February to May of last year, which totaled
1 percentage point, weren't a mistake.
Greenspan defended the rate hikes as necessary because the economy was then growing at an
"unsustainably" rapid rate, a pace so strong that it was causing long-term interest rates, which the
Fed doesn't control, to rise. With other rates rising because of economic forces, holding rates down would have required the Fed to supply "a massive increase" in the amount of money available in the economy.
"It was important to make certain that [spending increases] were contained, as indeed they eventually were
. As I look back at that period, I think the actions that we took were right at the time," he said.
Greenspan told the committee that businesses have begun to reduce their stocks of unsold goods by reducing production, which has been a major element in the sharp slowing of growth. That process is "a big adjustment
that has a way to run," and in the short run it's not clear how it will evolve, he said.
He remained confident that the strong productivity gains that have marked the nation's long economic expansion will continue, providing a solid base for long-term growth. But years of high business investment in new plants
and equipment, coupled with the growth slowdown, have left many industries with excess production capacity.
He warned that it could take years to work
that off.
Asked about the 11 percent drop in sales of new homes in January, reported yesterday, the Fed chairman
noted that the decline "really puts the number back where it was late last year. The outlier was
December," when the sales rate shot up to a record high of more than a 1 million-unit annual rate.
He also pointed out that housing starts also rose in January.
Asked by several committee members about his support of cutting taxes, Greenspan generally
reiterated the views he expressed in earlier hearings: Long-term economic growth is likely to be
strong enough that it will generate such large federal budget surpluses that the government will be
able to repay most of the publicly held portion of the national debt and still have large surpluses.
To avoid either substantial increases in spending or acquisition of large quantities of private assets,
both of which he opposes, taxes should be reduced, he said.
But the Fed chairman also continued to refuse to endorse any specific tax cut proposal, including
the $1.6 trillion one offered by President Bush.
Rep. Joseph Crowley (D-N.Y.) said Greenspan's assessment of the state of the economy is more
positive than that of the Bush White House, where the president and his advisers have been warning
about the danger of a recession and arguing that the Bush tax cut would help head off one. Is Greenspan
worried about that rhetoric? Crowley asked.
Greenspan didn't answer directly but did not dispute the premise that he has a different view.
"The one thing I know you can't do is try to spin the economy one way or the other. It doesn't work," he said. "Each of us has got to tell it the way we see it. . . . We have an open system in which economists all over the country in all industries are saying what they believe," and forecasts from the central bank or the White House
are "no more credible" than those of other economists.
But don't ordinary people pay more attention to White House comments and economic forecasts?
Crowly asked.
"I think that was true a number of years ago. But with cable television today, I'd say the answer to
that is probably no," Greenspan said.
© 2001 The Washington Post Company |
