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Soft patch Original Source Link: (May no longer be active)
http://story.news.yahoo.com/news?tmpl=story2&ncid=&e=2&u=/ap/20021113/ap_on_bi_ge/greenspan_economyhttp://story.news.yahoo.com/news?tmpl=story2&ncid=&e=2&u=/ap/20021113/ap_on_bi_ge/greenspan_economy
Greenspan: Economy Hits 'Soft Patch'
1 hour, 29 minutes ago
By MARTIN CRUTSINGER, AP Economics Writer
WASHINGTON (AP) - Federal Reserve (news - web sites) Chairman Alan Greenspan (news - web sites) warned Wednesday that shocks from falling stock prices and worries about war with Iraq are dimming business prospects, even though the economy has proven "remarkably resilient" over the past year.
Greenspan said the Fed's decision last week to cut interest rates by a larger-than-expected half point was the central bank's response to the growing dangers and he repeated the Fed's view in its rate cut announcement that the central bank believed the economy would be able to pull out of the current weak period.
"The actions taken last week to ease monetary policy should prove helpful as the economy works its way through this current soft spot," Greenspan said.
On Wall Street, the Dow Jones industrial average was up 86.63, or 1 percent, at 8,472.63, at midday after falling as much as 87.32 earlier. The market's broader gauges also were higher. The Nasdaq composite index rose 20.96, or 1.6 percent, 1,370.52. The Standard & Poor's 500 index advanced 7.98, or 0.9 percent, to 890.93.
In response to questions, Greenspan told the committee that he believed that the most likely outcome for economic growth is "to come out of this soft spot and to start accelerating."
He said if this occurs, the central bank will be ready to quickly reverse course and start pushing interest rates higher to make sure that inflation does not get out of control.
Greenspan, however, said if the central bank's expectations are wrong and the current sluggish period gets worse, then the Fed will cut rates further.
President Bush (news - web sites) told reporters at the White House that he agreed with Greenspan's view that the economy is not as strong as it should be.
"He uses the word soft spot. I use the words bumping along. Both of us understand that our economy is not nearly as strong as it's going to be," Bush said. "Our job here in Washington is to create the environment necessary for people to feel confident about risking capital."
The president promised to consider "new ideas" for improving the economy once Congress comes back into session next year.
Greenspan told the Joint Economic Committee there was no doubt that a number of forces were holding back growth currently. He cited in particular the fallout from revelations about corporate accounting scandals, the continued reluctance of businesses to increase their investment spending and "heightened geopolitical risks."
"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," Greenspan told the panel.
Greenspan said all of these problems were creating uncertainty among consumers, who have been the driving force in the current recovery, and among businesses.
"Households have become more cautious in their purchases, while business spending has yet to show any substantial vigor," Greenspan said.
He said it was against this backdrop that the Fed's interest rate panel, the Federal Open Market Committee (news - web sites), decided last week to cut its target for the federal funds rate, the interest that banks charge on overnight loans, by a half-point to 1.25 percent, the lowest level in 41 years.
Greenspan gave no hint in his prepared testimony about what the central bank might do next, but private economists believe if the economy continues to weaken, the central bank will cut rates again either at its next meeting in December or at its first meeting of the new year in January.
Greenspan said that even with the current slowdown, the U.S. economy has proven its adaptability over the past year since the Sept. 11, 2001 terrorist attacks, managing to grow at an average rate of 3 percent over since the fourth quarter of 2001.
"A year ago, we were struggling to understand the potential economic consequences of the events of Sept. 11," Greenspan said. "The United States economy, however, proved to be remarkably resilient."
Greenspan was praised during his appearance by Rep. James Saxton, R-N.J. and chairman of the panel, for his record over 14 years as Fed chairman for wringing inflation out of the economy.
But Greenspan sought to deflect the praise, saying that the "really difficult work" in getting inflation down from double-digit levels of the early 1980s had occurred under the chairmanship of his predecessor, Paul Volcker.
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