Greenspan: Economy Soft, Not Falling Down 59 minutes ago
By Glenn Somerville
WASHINGTON (Reuters) - Federal Reserve (news - web sites) Chairman Alan Greenspan (news - web sites) said on Wednesday the U.S. economy was weighed down by worry over possible war and falling stock prices but not by dangerous imbalances that tended to herald recession.
In testimony before Congress' Joint Economic Committee, Greenspan said last week's sharp interest rate cut should help the country through its "soft patch," adding that if the recovery unfolds as he expects, no more stimulus was needed.
"It is the case that while the economy is softening or stagnant, there is no evidence ... at least up to the moment, that it is accelerating on the downside," the Fed chief said during questioning by lawmakers. "What we do have is a very large degree of uncertainty."
"So if I were to assume that the outlook is exactly what the most probable path is, then I would say no additional stimulus is necessary," he said.
Analysts said while Greenspan's prepared remarks echoed the tone of the statement issued after the Fed's Nov. 6 meeting, his later comments struck a more optimistic note.
"Unless more shocks hit the economy in coming months, we believe the Fed is done cutting rates," said Merrill Lynch senior economist Gerald Cohen.
The veteran Fed chief's testimony coupled an explanation of the U.S. central bank's unexpectedly steep rate cut, the first in 2002 and the 12th since last year, with an assurance that the latest policy action should offer a needed boost.
"Although economic growth was relatively well-maintained over the last year, several forces have continued to weigh on the economy," Greenspan said. He cited a slow recovery in capital spending, fallout from corporate scandals, sliding stock markets and fears about a possible U.S. attack on Iraq.
"Over the last few months, these forces have taken their toll on activity, and evidence has accumulated that the economy has hit a soft patch," he added.
SLOWDOWN TEMPORARY ADVERTISEMENT
In later questioning, the Fed chief attempted to buttress the idea that the weakness was temporary and to downplay concern it could lead United States to a situation Japan faces, in which deflation -- or a widespread fall in prices -- drags the economy into a prolonged decline.
Clearly seeking to reassure that risks of renewed recession were low, Greenspan said: "We don't have the usual weaknesses that presage an economy going down in a cumulative manner."
While the Fed chairman was still testifying before lawmakers, President Bush (news - web sites) told reporters at the White House he agreed with Greenspan that the economy was in a rough spot and "bumping along" at an unacceptably weak pace.
Bush, whose Republican party won control of both houses of Congress in Nov. 5 elections, said he wanted to discuss new ways to spur growth when a new Congress convenes in January.
Several lawmakers pushed the Fed chief for comment on the Bush administration's huge tax cuts last year, but he sidestepped efforts to draw him into debate on the subject.
He said only that financial markets have assumed the tax cuts will be made permanent, as Republicans prefer, and might react badly if they were taken back.
The Fed's half-point cut on Nov. 6 brought the trendsetting federal funds rate target to a fresh four-decade low of 1.25 percent. Greenspan said the unexpectedly large rate slash was affordable "insurance" against a steeper downturn and noted it could be reversed quickly if growth picks up as expected.
While consumers were becoming more cautious, Greenspan said he did not foresee a sharp slump in spending, an economic mainstay through last year's recession and the uneven recovery this year. He did say a recent drop in car sales bore close watching to determine if it was a pullback from earlier strength or marked a real decline in demand.
"Households have become more cautious in their purchases while business spending has yet to show any substantial vigor," Greenspan said.
Business spending is seen by Fed officials and economists as crucial to a sustainable economic recovery.
IRAQI CLOUDS
One of the clouds on the economy -- possible war with Iraq -- showed signs of lifting Wednesday morning as Iraq announced it would accept a U.N. Security Council resolution requiring the country to disarm, passed last week by a 15-0 vote.
U.S. stock prices, in negative territory as Greenspan discussed the economic "soft patch," reversed to bounce higher on the Iraqi news. Bonds that had been a safe haven for worried investors lost ground.
Economist Ken Mayland of ClearView Economics LLC suggested the Fed's emphasis on Iraqi tensions as a headwind against economic growth meant that, once finally resolved by war or negotiation, a return to healthy growth could become "a self-fulfilling prophecy."
Greenspan was emphatic that Fed policymakers, while wary, did not see a high chance of deflation and instead said "the most likely projection" was the economy will come through its current bout of softness and begin accelerating.
"We have seen no evidence at this point that we are close to a dangerous point with respect to deflation but we are very consciously aware that we cannot allow that to creep up on us unseen," he said. "So we've put a lot of resources into examining and reevaluating this conclusion all the time."