Impristine...the original green man himself seems to be feeling haunted these days.
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Greenspan Speech Was Misjudged, Aides Say
By John M. Berry
Washington Post Staff Writer
Saturday, January 19, 2002; Page A01
Federal Reserve Chairman Alan Greenspan, in a speech last week, sounded more pessimistic than intended about the prospects for U.S. economic recovery, according to several Fed sources.
Stock prices fell steeply after he began the Jan. 11 speech, in part because of his cautious tone and apparent emphasis on the "significant risks" to the economy. Bond traders also concluded that Greenspan was signaling that the Fed would lower interest rates again later this month.
However, this week, a number of Fed officials expressed surprise at that interpretation and suggested that the market had "over-interpreted" what the chairman had said.
According to several sources, it is much more likely that the chairman will propose that the Fed's target for overnight rates be left unchanged when the central bank's policymakers meet Jan. 29 and 30.
That would sit well with many of the other 16 policymakers who will attend the meeting, the sources said. Nevertheless, some of the sources cautioned, a rate cut cannot be completely ruled out.
Part of the confusion over the speech was due to the subtlety of Greenspan's intended message that the recession was likely to end soon, but that a quick, strong rebound was not assured.
Greenspan chooses his words very carefully, keenly aware that his public utterances are closely parsed by the markets and often move global stock and bond prices. An economist who speaks in highly technical language about extremely arcane subjects, he also is so aware of his reputation for impenetrable prose that he occasionally plays it for laughs. He usually writes his own first drafts of speeches and is heavily involved in editing them.
Greenspan's earlier drafts of the Jan. 11 speech were more optimistic about the prospects for recovery, sources said, so much so that the tone raised worries that the markets would expect a sharper upturn in economic growth than he foresees.
That would be a problem for the economy if it strengthened the belief among some analysts and investors that the Fed would move quickly to raise short-term interest rates, perhaps even before the middle of the year. That belief had helped cause long-term rates to rise in recent months. But if Greenspan could temper those expectations, then perhaps those longer-term rates could come back down somewhat, Fed sources said.
So as the speech was fine-tuned, much of the optimism leaked away; the final version left listeners and readers hearing a very different message than intended.
In the speech in San Francisco, Greenspan acknowledged that the recession that began last spring shows signs of ending. "Signals about the current course of the economy have turned from unremittingly negative through the late fall of last year to a far more mixed set of signals recently," he said
But he immediately added, "I would emphasize that we continue to face significant risks in the near term." He read a sizable list of risks, including weak business profits and investment, uncertain prospects for consumer spending, rising unemployment and the past two years of falling stock prices.
Given that litany, many investors and financial analysts quickly concluded that Greenspan was preparing the market for another reduction in the Fed's target for overnight interest rates, which now is 1.75 percent. The Fed has lowered the target 11 times, by a cumulative 4.25 percentage points since the beginning of last year, to try to boost the economy as it slid into recession.
Greenspan will have an opportunity next Thursday to clarify his message when he testifies before the Senate Budget Committee.
In deciding whether to lower the interest-rate target again, a key point for many Fed officials is that the effect of rate cuts on the economy is delayed. Many of the previous Fed rate cuts -- particularly those that occurred after the Sept. 11 terrorist attacks -- haven't had time to have much effect yet. Even if the Fed leaves its target unchanged this month, the recent cuts will continue to stimulate economic activity for months to come.
However, in last week's speech, Greenspan cautioned that it was too early to be sure about the nature of the recovery. "Despite a number of encouraging signs of stabilization, it is still premature to conclude that the forces restraining economic activity here and abroad have abated enough to allow a steady recovery to take hold," he said.
Since Greenspan's speech, several economic reports -- on initial claims for jobless benefits, industrial production, business inventories and consumer confidence -- all suggested that the recession is over or nearly so, analysts said.
"The economic news clearly indicates the economy is turning," said Bill Dudley, chief economist for Goldman Sachs in New York. "First-quarter economic growth will almost certainly be positive" after declines in the third and fourth quarters of last year. "I would put the trough of the recession in December," he said.
Economists also took comfort from improving consumer attitudes, hoping they indicate a continued willingness to spend. Yesterday the University of Michigan said its consumer sentiment index rose to 94.2 for the early part of this month, the highest level in a year, from 88.8 in December. The index reached a low of 81.8 in September after the terrorist attacks. All of the improvement this month came in consumer expectations of improved economic conditions later this year.
Earlier this week, the Fed reported that industrial production fell 0.1 percent last month, much less than in several previous months and a possible indication that the hard-hit manufacturing sector is stabilizing. Motor-vehicle output rose strongly in December, and even production of semiconductors and computers, which had been extremely weak earlier in 2001, was rising again.
Meanwhile, inflation remains subdued. The Labor Department said this week that consumer prices fell 0.2 percent last month, primarily because of falling energy prices, and were up only 1.6 percent from December 2000.
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