Some "talking heads " continue to amaze me....Allergedly rate cut is great for home builders and Home Depot likes..because lower rates would mean more people can afford to buy houses....That is nevermind that cut means slower economy or even recession....Go figure.....
Greenspan Says U.S. Slowdown Is Likely to Intensify, Hinting at Rate Cut
U.S. Economy: Greenspan Hints at Interest Rate Cut (Update3) (Adds analyst comment in 9th paragraph.)
Washington, Sept. 23 (Bloomberg) -- Federal Reserve Chairman Alan Greenspan prompted the biggest stock market rally in more than two weeks when he hinted in congressional testimony he may argue next week for lower interest rates to keep the U.S. economy from slowing too much.
Greenspan, in his clearest warning yet that the eight-year U.S. expansion is at risk, said falling stock prices, declining corporate profits and tougher borrowing terms for some business borrowers -- consequences of recessions and slowing economies worldwide -- could persuade U.S. consumers to reduce their spending. ''Deteriorating foreign economies and their spillover to domestic markets have increased the possibility that the slowdown in the growth of the American economy will be more than sufficient to hold inflation in check,'' Greenspan told the Senate Budget Committee.
Greenspan said the economy is ''still in pretty good shape'' and retains underlying strength. ''We're fraying at the margins, but we've got a very low unemployment rate, we've got demand at a solid basis, our growth is reasonably solid.''
The risks to the U.S. economy are coming from overseas, he said. And for that reason, financial market stability must be restored ''reasonably shortly to present the contagion from spilling over and creating difficulties for all of us,'' he said.
Stocks Rise, Yields Fall
That comment came in response to a question about whether the Fed is planning to cut the overnight bank lending rate from its current 5.50 percent at next Tuesday's meeting of the Federal Open Market Committee. Such a move would be the first policy change in 18 months and the first interest-rate cut in 32 months. ''It's no longer a matter of if, it's a matter of how much,'' said Richard Yamarone, a senior economist at Argus Research Corp. in New York. ''If he's going to pull the trigger, there could not be a more appropriate time to do so, when the risk of an economic slowdown is much greater than that of inflation.''
A rate cut could exceed 25 basis points, said Bruce Steinberg, chief economist at Merrill Lynch & Co. in New York. ''We believe more easing will follow, and that the Fed funds rate will come down by 75 to 100 basis points, and potentially more.''
U.S. stocks rose, the dollar gave up earlier gains against other major currencies and yields on most Treasury securities fell after Greenspan spoke.
The Dow Jones Industrial Average rose 257 points, or 3.26 percent, to close at 8154.41. Yields on three-month and six-month Treasury bills -- those most sensitive to Fed actions -- fell 12 and 17 basis points, respectively. The Treasury's benchmark 30- year bond recovered some earlier losses, falling 1/4 point and pushing up its yield 2 basis points to 5.17 percent.
Liquidity Concern
The underlying global problem is a lack of liquidity, Greenspan suggested, as investors and traders withdrawn funds from emerging markets such as Brazil, disregarding the inherent values in those markets. That is disrupting the flow of funds through financial markets, he said. ''With few signs that the financial crisis that started in Asia last year has subsided, or is about to do so, policymakers around the world have to be especially sensitive to the deepening signs of global distress, which can impact their own economies,'' Greenspan said.
Testifying along with Greenspan, Deputy Treasury Secretary Lawrence Summers also pushed Congress to provide the International Monetary Fund with the additional $17.9 billion in funding the Clinton administration has requested. ''The IMF's involvement is central to an effective international response,'' he said. ''And today the IMF's resources are at historic lows.''
Message to Europeans?
Greenspan began dropping hints about the need for lower interest rates earlier this month. That reversed his stance in congressional testimony in late July that higher borrowing costs might be need to cool an economy showing few signs of slowing.
He told the House Banking Committee last week that he has seen some ''erosion'' in the U.S. economy. That followed a speech in Berkeley, California on Sept. 4 when he said U.S. economic growth is likely to be slowed by global market woes. ''It's just not credible that the United States can remain an oasis of prosperity unaffected by a world that is experiencing greatly increased stress,'' he said at the University of California.
He expanded on that theme today by noting that Europe won't be able to remain an oasis of prosperity, either -- a subtle hint that European central banks may also need to reduce interest rates.
Russia's economic collapse in mid-August triggered the latest round of global financial instability, Greenspan said.
While Russia's impact on the world economy 'is not large,'' the severity of the crisis shocked investors, who began pulling funds out of emerging markets around the world. That pushed interest rates ''sharply higher across the globe,'' Greenspan said. 'More Virulent Phase' ''In recent weeks, that shift internationally has also been accompanied by a rising concern for risk in the United States, presumably reflecting the fear that the contagion would adversely affect our economy,'' Greenspan said.
The initial effect of the Asian financial crisis on the U.S. economy had been positive because it led to lower long-term interest rates, he said. Now, ''however, the most recent more virulent phase of the crisis has infected our markets as well. Concerns about business profits and a general pulling back from risk-taking in the midst of great uncertainty around the globe have driven down stock prices and pushed up rates on the bonds of lower-rated borrowers,'' Greenspan said.
That's having a big effect on business in the U.S., he said. Stock and bond issuance by lower-rated U.S. companies ''has come virtually to a halt; even investment-grade companies have cut back substantially on their borrowing in capital markets,'' the Fed chairman said. ''Banks are also reportedly becoming more cautious and more expensive lenders to many companies.''
The Fed chairman repeated many of the same prescriptions he's offered in the past for dealing with the global crisis. Countries must improve transparency in their economic and banking systems to enable investors to better assess risk. Commercial and legal structures must be set up to protect commerce and investment, and there must be better supervision of banking and financial systems. 'Ad Hoc Remedies' ''I must also stress the obvious necessity of sound monetary and fiscal policies whose absence was so often the cause of earlier international financial crises,'' Greenspan said.
However, the Fed chairman warned the transition to more effective and more stable financial systems ''will take time.''
Given that, Greenspan suggested some sort of international financial rescue package for affected countries, including Brazil, may be forthcoming. ''The current crisis, accordingly, will have to be addressed with ad hoc remedies,'' Greenspan said. ''It is essential, however, that those remedies not conflict with a broader vision of how our new international financial system will function as we enter the next century.''
Since U.S. inflation is so benign, Fed officials have room to reduce rates. Consumer prices in the first eight months of the year rose at a 1.6 percent annual rate, the same as in the first eight months of 1997.
Other Fed Voices
Over the past two weeks, a number of Greenspan's colleagues at the Fed have said the global economic slowdown that began a year ago in Asia is taking a toll on U.S. economic prospects.
Federal Reserve Bank of Richmond President J. Alfred Broaddus said today that stabilizing financial markets in Brazil and other Latin American countries, and preventing the spread of the global slowdown that started in Asia, will be on the table when Federal Reserve policymakers meet next week.
Investors around the world are fleeing equity markets and buying relatively safer U.S. Treasury securities, Broaddus said, speaking to an audience of students and faculty at Frostburg State University. ''That's creating significant problems for countries that are fundamentally pretty strong,'' particularly Brazil and other Latin American countries, he said. ''This is ''an issue that we have to deal with.''
New York Fed President William McDonough said in London yesterday that slowing growth now poses more of a danger to the U.S. economy than inflation. That suggests he may have become more open in recent days to the idea of a cut in U.S. interest rates. McDonough's views gained support from two non-voting members of the FOMC, Chicago Fed Bank President Michael Moskow and Atlanta Fed Bank President Jack Guynn.
There are some who still say chances of an interest-rate cut next week from the Fed are slim. The ''predominant view'' among Fed policymakers is that the case now for a rate cut ''is simply not very strong'' because of the strength of the domestic economy, former Fed Vice Chairman Alan Blinder said in a Washington speech yesterday.
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