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reenspan Warns That Economic Weakness Has Not Yet Ended

By Martin Crutsinger The Associated Press Published: May 24, 2001

WASHINGTON (AP) - Federal Reserve Chairman Alan Greenspan, warning of "considerable uncertainties" in the economic outlook, said Thursday night that the current period of slow growth has not yet ended. He said there was still a threat that business activity could weaken further. While delivering a sober assessment of the dangers still facing the economy, Greenspan signaled that an absence of inflationary pressures left the central bank with plenty of room to cut interest rates further if needed to guarantee that a sustained rebound will occur.

"The period of sub-par economic growth is not yet over, and we are not free of the risk that economic weakness will be greater than currently anticipated, requiring further policy response," Greenspan said in a dinner speech to Economic Club of New York.

Greenspan did not use the word "recession," but his remarks signaled that a possible recession remained a threat to the economy.

Private economists said they viewed Greenspan's remarks as a clear indication that the central bank was prepared to cut rates further given the lingering weakness in the economy.

"Greenspan is right. We are not out of the woods yet concerning whether we will avoid a recession," said David Wyss, chief economist at Standard & Poor's in New York.

He predicted that the Fed will cut rates by another half point when its policy-makers meet again on June 26-27.

The Fed has already cut interest rates five times this year in the most aggressive easing move ever carried out during Greenspan's nearly 14 years as head of the central bank.

Those moves have reduced the federal funds rate, the interest that banks charge each other, by 2.5 percentage points, driving borrowing costs for millions of American consumers and businesses to the lowest level in seven years.

Noting these moves, Greenspan said, "Our front-loaded policy actions this year should be providing substantial support for a strengthening of economic activity later this year."

But Greenspan indicated that concerns about greater-than-expected weakness were likely to persist for "several quarters."

Signaling that the Fed was prepared to cut rates further, Greenspan said that he could detect no signs that inflation was threatening to get out of control. He said the economic slowdown that began last summer was helping to hold down prices.

"The lack of pricing power reported overwhelmingly by business people underscores an absence of inflationary zest," Greenspan said. He predicted that inflation pressures should lessen further as energy prices retreat and the rising unemployment rate takes pressure off previously tight labor markets.

Greenspan's speech, copies of which were released in Washington, stood in contrast to speeches by other Fed officials this week, which had generally struck a more optimistic tone about the prospects of a rebound.

Earlier Thursday, Federal Reserve Board member Laurence Meyer said he believed the Fed's rate cuts would help the U.S. economy return to an annual growth rate of around 3.5 percent to 4 percent. That is the level the central bank considers optimal.

"As the effect of the recent easing takes hold ... growth should gradually recover and the economy should gradually return to trend growth," said Meyer.

On Tuesday, two other Fed officials, Anthony Santomero, head of the Fed's Philadelphia regional bank, and Gary Stern, president of the Minneapolis Fed branch, had both predicted a return to healthy growth of around 3 percent to 4 percent, with Stern saying he was looking for a "significant" improvement in the second half of this year.

In his speech, however, Greenspan chose to emphasize the number of threats still facing the economy.

He said that businesses were continuing their efforts to curb production to get rid of an excess of unsold goods. He said that excess inventories of high-tech products, such as computers, semiconductors and communications equipment, have backed up significantly as demand has flagged.

Higher energy prices also are likely to "weigh on the economy" in the short run, putting a squeeze on corporate profits, Greenspan said.

And he raised concerns about how well the consumer - the main force propping up the economy - will hold up in the face of a prolonged period of weaker growth and rising unemployment.

He said eventually businesses will be able to get their stockpiles better in line with demand and will begin placing new orders.

However, he said, there remained "considerable uncertainties" about when this will occur and how strong the rebound in orders and production will be.

http://ap.tbo.com/ap/breaking/MGA7CKT95NC.html

-- Martin Thompson (mthom1927@aol.com), May 24, 2001

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-- Loner (loner@bigfot.com), May 25, 2001.