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Greenspan: Economy Wounded but Resilient
Tue Jul 16, 5:08 PM ET
By Joanne Morrison
WASHINGTON (Reuters) - The U.S. economy is resilient but needs time to heal after a barrage of corporate scandals and stock market losses, Federal Reserve ( news - web sites) Chairman Alan Greenspan ( news - web sites) said on Tuesday, signaling that interest rates would stay at four-decade lows for now.
Greenspan's remarks for a while seemed to reassure Wall Street, with the Dow Jones Industrial Average at the close of his 2-1/2 hour Senate Banking Committee appearance crawling back to mild losses from triple-digit declines in early activity. But heavy selling reared its head again later driving the average to its seventh-straight decline.
During his testimony, Greenspan did warn repeatedly that wounds from the accounting scandals, stock market slide and the Sept. 11 attacks would be lasting.
"While the economy has held up remarkably well, not surprisingly the depressing effects of recent events linger," the Fed chief told the Senate panel.
But he did emphasize that the economy is getting better.
"All the evidence that we have been able to accumulate in recent weeks suggests that the economy is improving," he said later during questioning by lawmakers. "It's pretty much in line with our expectations."
On Wednesday, Greenspan appears before the House of Representatives Financial Services Committee to deliver formal testimony, which is likely to be unchanged from Tuesday's, and to face another round of lawmaker questions.
Greenspan's financial market balm wore off later on Tuesday. The Dow Jones Industrial Average <.DJI> fell 166.08 points, or 1.92 percent, to 8,473.11, according to the latest data. The Nasdaq composite <.IXIC> ended down 7.36 points, or 0.53 percent.
"HARVESTING" GAINS
On the issue of the multibillion-dollar accounting errors of corporations that have rocked financial markets for months, the influential Fed chairman was sharply critical, accusing executives of trying to "harvest" stock market gains.
"An infectious greed seemed to grip much of our business community," Greenspan said, warning that the economy cannot achieve its full potential if investors lose faith in the rules that govern companies and markets.
Greenspan also urged the Bush administration and Congress to curb spending, cautioning that fiscal discipline -- critical to sustained economic growth -- has eroded.
"I think that we can curtail spending far more than we do," he said. "The best way in which the economy can function is to hold spending down and get as low a tax base as you can to enable the economy to expand as rapidly as you can."
RECOVERY PATH SET
Wall Street analysts agreed that the Fed chief's underlying message was that the economy is indeed set for recovery, taking heart from the fact that the Fed raised forecasts in its Monetary Policy report accompanying the testimony.
Fed policymakers had better projections for economic growth in 2002 than they did earlier this year. The Fed's central tendency forecast for real gross domestic product (GDP ( news - web sites)) growth this year was 3-1/2 to 3-3/4 percent, with gains sufficient to bring the jobless rate down to 5.25 to 5.5 percent by the end of 2003.
The growth forecast was up from the 2-1/2 to 3 percent real GDP growth they forecast in February,
"Despite his caveats, Greenspan clearly believes that the recovery is taking stronger hold, and, by next year, the U.S. economy will be growing healthily," said Bruce Steinberg, Chief Economist at Merrill Lynch in New York.
The unemployment rate currently stands at 5.9 percent, according to the government's latest figures.
Greenspan said mild inflation had given the Fed leeway to keep U.S. interest rates at the current 40-year low of 1.75 percent and added that the central bank had decided to maintain that easy stance until the economy is out of the woods.
"We have chosen to maintain that (accommodative) stance pending evidence that the forces inhibiting economic growth are dissipating enough to allow the strong fundamentals to show through more fully," Greenspan said.
That comment all but cemented Wall Street sentiment that interest rate increases won't likely be seen until next year.
"He did not send a signal that he was thinking about easing rates. I think we can put that to rest," said Anthony Chan, chief economist at Banc One Investment Advisers in Columbus, Ohio.
Still, Greenspan said that while consumer spending has performed well, business investment -- a key ingredient to a solid, long-lasting recovery -- could be hindered by corporate scandals as "chastened CEOs" restate their company earnings.
The firestorm of controversy surrounding misdeeds at Enron and WorldCom have helped drive down major stock indices to multiyear lows and Greenspan noted that many firms have turned understandably cautious in the current environment.
"A recovery in this category of spending is likely to be gradual by historical standards and uneven across sectors," he said.
The Fed chief also said a potential risk to the consumer sector lies in the damage that corporate scandals have done to the stock market. Many major market indices are now at multiyear lows after disillusioned investors shed stocks.
"Spending will continue to adjust for some time to the declines that have occurred in equity prices," Greenspan said.
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