ABC

WIRE: 07/18/2001 10:25 am ET

Greenspan says risk of weakness remains; rate cut possible

The Associated Press

WASHINGTON(AP) Federal Reserve Chairman Alan Greenspan on Wednesday cautioned that the yearlong economic slowdown has not ended and may require another interest-rate reduction to revive sluggish growth.

"The period of subpar economic performance ... is not yet over, and we are not free of the risk that economic weakness will be greater than currently anticipated and require further policy response," Greenspan said in his twice-a-year report on the economy.

In an effort to stave off recession, the Federal Reserve has slashed interest rates six times this year, totaling 2.75 percentage points, the most aggressive credit-easing campaign in nearly two decades.

Greenspan, in testimony to the House Financial Services Committee, expressed hope that the Fed's rate reductions along with falling energy costs and soon-to-be mailed tax-rebate checks will bolster economic growth in the coming months.

"By aggressively easing the stance of monetary policy, the Federal Reserve has moved to support demand, and, we trust, help lay the groundwork for the economy to achieve maximum sustainable growth," Greenspan said in his prepared testimony.

One of the reasons the Fed has been able to cut interest rates so much, Greenspan said, is because inflation is well contained. That should continue, given that energy prices are starting to fall.

Still, "Uncertainties surrounding the current economic situation are considerable," he said.

Greenspan's words are typically awaited with anxiety and anticipation. Decisions that he and the Fed make in terms of directing monetary policy substantially affect the lives of people, from would-be home-buyers and investors to people seeking jobs or trying to borrow for a college education.

His prepared testimony Wednesday did nothing to soothe investors. In the first hour of trading the Dow Jones industrial average lost more than 100 points and the Nasdaq index was down 45 points.

Before Greenspan testified, the government reported that the consumer price index, a closely watched inflation gauge, rose 0.2 percent in June, while the costs of gasoline and other energy products retreated. However, electricity prices posted a record rise. Housing construction, a pillar supporting the economy, posted a strong 3 percent increase, another report showed.

Until there is more evidence that businesses have successfully completed getting their excess stocks in line with sales and companies ramp up investment in computers and other equipment, "The risks would seem to remain mostly tilted toward weakness in the economy," Greenspan said.

Much of the economic slowdown comes from businesses rapidly and sharply cutting back on production in the face of sagging demand. Companies have laid off workers, trimmed hours and deeply discounted merchandise to work off excess inventories.

Economic upheaval in other countries, coupled with rising energy prices last year into this year, intensified the slowdown and drained businesses' and consumers' purchasing power, Greenspan said.

Greenspan did not predict when businesses would complete the paring of inventories.

"At some point, inventory liquidation will come to an end, and its termination will spur production and incomes," he said.

Economists say once companies work off excess inventories, they will be in a position to rev up production, which would bode well for a rebound in economic growth.

Consumers, whose spending accounts for two-thirds of all economic activity, have been a main force keeping the economy afloat. Household disposable income, Greenspan said, is now being bolstered by President Bush's new tax cuts.

Yet, there are downside risks to consumer spending in the next few quarters, he said. The sagging stock market has reduced household wealth and is likely to restrain consumer spending in the future. A weaker labor market also could damp spending.

Even against these risks, Greenspan said, "It is notable how well the U.S. economy has withstood the many negative forces weighing on it."

Nonetheless, Fed policy-makers have lowered their forecast for economic growth this year, as measured by the Gross Domestic Product. The range of economic growth in 2001 is now forecast between 1 percent and 2 percent, rather than 2 percent to 2.75 percent. They predicted the economy would rebound to a stronger rate of growth in the range of 3 percent to 3.5 percent in 2002.

-- Anonymous, July 18, 2001

Answers

The interest rate on my savings account sank to 1.0%. I opened a money market account and for the time being should get 3.75% (better than a short-term CD).

-- Anonymous, July 18, 2001