The insanity continues ! <NG>
Fed chief: Recovery has hit 'soft patch'
boston.com
By Sue Kirchhoff, Globe Staff, 11/14/2002
ASHINGTON - Federal Reserve Board chairman Alan Greenspan said yesterday the economy had hit a soft patch, due largely to what he called ''risk overhang'' - heightened business and consumer concern about corporate scandals and a possible war with Iraq.
In testimony to Congress' Joint Economic Committee, Greenspan said the economy began slowing in late summer, buffeted by lackluster business spending, a depressed stock market, and higher corporate financing costs and lingering uncertainty. He predicted the Fed's Nov. 6 half-point interest rate cut, which took short-term rates down to a 41-year low of 1.25 percent, would help to turn the picture around.
Greenspan said he had not yet decided whether Washington needed to provide additional stimulus in the form of new tax cuts, repeatedly calling on Congress to develop a coherent, long-term budget strategy.
''Our best judgment is that we're going through a soft patch that is not something, which is the precursor of far more significant weakening,'' Greenspan said, adding that firms were not hampered by excess inventory or capital stock.
''The economy as such is not evidently significantly out of balance. ... We don't have the usual internal weaknesses that presage an economy going down in a cumulative manner. What we do have is a very large degree of uncertainty, both as a consequence of corporate governance and as a consequence of geopolitical risks. And they are creating some significant hesitation,'' Greenspan said.
Greenspan said that, with inflation so low, Fed policy makers felt they had room to cut short-term rates by a larger than expected half-point to buy additional insurance for the economy - and minimize the risk of a downturn if their expectation for continued growth proved to be wrong.
Greenspan said the economy was likely to ''come out of this soft spot and to start accelerating'' when the current climate of uncertainty lifted. He said the Fed was ready to raise rates when that happened, and willing to cut them again if it did not.
The economy has grown at a 3 percent annual pace this year, though it has slowed considerably since July as consumers have reduced spending on big ticket items like cars. Greenspan said it was too soon to tell whether the diminished consumer activity was simply a payback from record sales earlier this year, or a worrying sign of new softness.
''Consumer spending has slowed over the past year, but has not slumped as some had feared it might,'' Greenspan said.
Meeting with reporters at the White House, President Bush shared Greenspan's concerns about the economy, though not his hesitations about a new stimulus package. Bush has already begun to talk to Congress about additional tax cuts.
''He uses the words `soft spot,' I use the words `bumping along.' Both of us understand that our economy is not nearly as strong as it's going to be,'' Bush said. ''I sent a signal to Congress that I believe that we need to have further discussions how to best stimulate the economy, and I'm very serious about that.''
Market analysts interpreted Greenspan's testimony as a signal that the Fed would not cut rates further, barring an unexpected shock to the economy. But some questioned his relatively upbeat assessment, saying they were concerned business activity could weaken further through the end of the year.
In response to questions from lawmakers, Greenspan said making Bush's $1.6 trillion tax cut permanent, a White House priority, would not stimulate the economy. At the same time, he said repealing portions of the tax cut that have yet to take effect could have a negative impact.
He said business spending had yet to develop any ''substantial vigor,'' with firms reluctant to expand, take on new workers, or buy new equipment. Cost cutting and other efficiencies have helped fuel additional hikes in productivity, the measure of output per worker, leaving the economy in a good position moving forward. Greenspan warned, however, there were limits to how long the gains in productivity, which started in the mid-1990s, can be sustained.
''History does raise some warning flags concerning the length of time that productivity growth remains elevated,'' Greenspan said.
Despite his concerns about the impact of corporate scandals, Greenspan did not expect the recent political controversy surrounding a special board to oversee the accounting industry - part of a sweeping new law to crack down on business corruption - to have a serious impact.
Securities and Exchange Commission chairman Harvey Pitt, accounting board chairman William Webster, and the SEC's chief accountant all resigned last week because of controversy surrounding Webster's appointment, among other things.
Greenspan said the irrational greed that had gripped the business community during the stock market run-up of the 1990s had dissipated with the stock market's fall, since ''there is no longer anything to be greedy about.'' He said corporations were scrubbing their books and imposing new discipline. Over the longer term, however, the new federal law will be important for preventing another wave of corporate scandals.
Sue Kirchhoff can be reached at kirchhoff@globe.com. |
