Nation slow to find solution to sluggish economy
August 2, 2001
WASHINGTON(AP) Federal Reserve Chairman Alan Greenspan foresees no quick end to sluggish economic growth and signaled Wednesday that the Fed stands ready to cut interest rates for a seventh time this year.
”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 told the House Financial Services Committee in his twice-a-year report on the economy.
In an effort to stave off recession, the Federal Reserve has cut interest rates six times this year, totaling 2.75 percentage points. It has been the most aggressive credit-easing campaign in nearly two decades.
Greenspan expressed hope that the Fed’s actions, combined with falling energy costs and soon-to-be mailed tax-rebate checks, will bolster an economy stuck in low gear for a year.
”The rate of deterioration is clearly slowing,” Greenspan said.
Although he offered some encouraging comments, he cautioned: ”The risks would seem to remain mostly tilted toward weakness in the economy.”
That is likely to be the case, he said, until there is more evidence that businesses have gotten their excess stock in line with sales and companies increase investment in computers and other high-tech equipment.
Much of the slowdown comes from businesses sharply cutting back on production and on capital spending in the face of sagging demand. Economic upheaval in other countries, coupled with rising energy prices last year into this year, intensified the problem and drained the purchasing power both of businesses and consumers, Greenspan said.
Economists viewed Greenspan’s remarks as a signal that an additional interest rate cut could come as soon as the Fed’s next meeting on Aug. 21. But they believe the Fed, wary of inflation down the road, would limit any further rate reductions to more conservative quarter-point moves.
On Wall Street, investors frustrated by signs that an economic rebound will take longer to materialize sold stocks lower.
Fed policy-makers, in their economic report, forecast that the economy’s growth would slow this year to around 1 percent to 2 percent but pick up next year, expanding by 3 percent to 3.5 percent.
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. Electricity prices, however, posted a record rise.
Housing construction, a pillar supporting the economy, posted a strong 3 percent increase, a second government report showed.
Even with the pickup in the consumer price index, ”There’s very little inflation in our economy,” Greenspan said during the hearing. Fed policy-makers, though, must remain vigilant to price pressures, he added.
Consumers, whose spending accounts for two-thirds of all economic activity, have been a main force keeping the economy afloat. Household disposable income ”is now being bolstered” by President Bush’s new tax cuts, Greenspan said. He did not elaborate.
He also referred to downside risks to consumer spending in the next few quarters. The sagging stock market has reduced household wealth and is likely to restrain consumer spending in the future. A weaker labor market also could restrict spending.
Answering questions at the hearing, Greenspan said he did not believe the financial turmoil in Argentina would affect the U.S. economy.
The risk of Argentina’s problems spreading to this country ”is not very large at this particular point … and I don’t expect it to become very large,” Greenspan said.
He also repeated his belief that the current slowdown should not harm the long-term outlook for budget surpluses. That is because the long-term outlook for productivity growth, aside from a temporary lull because of weak economy, is bright, he said.
Productivity, the amount of output per hour of work, is a key factor in surplus projections.
On the Net: Greenspan testimony: http://www.federalreserve.gov/boarddocs/hh/2001/july/testimony.htm