Central bank chairman says U.S. economy poised for eventual rebound, though risks remain.
May 21, 2003: 10:03 AM EDT
NEW YORK (CNN/Money) - Federal Reserve Chairman Alan Greenspan repeated his belief Wednesday that the U.S. economy is poised for stronger growth, though businesses remain cautious and a remote risk of a slowdown in inflation remains.
The central bank chairman, in prepared remarks delivered to the Joint Economic Committee of Congress, said the economy "continues to be buffeted by strong cross currents," with weak readings on production and employment, but that stronger financial markets and productivity growth are pointing the way to a rebound.
"Looking ahead, the consensus expectation for a pickup in economic activity is not unreasonable, though the timing and extent of that improvement continue to be uncertain," Greenspan said.
Greenspan again highlighted the risk of an "unwelcome substantial fall in inflation," which he said was minor. After battling inflation for decades, the Fed is suddenly confronted with the prospect of deflation, an unstoppable drop in prices that hurts corporate profits and leads to further economic weakness.
Most economists believe it would take several months of weak economic activity to bring on deflation, and most doubt such a sluggish run is in the cards.
Still, inflation is very low -- the 12-month change in the Labor Department's consumer price index (CPI) was just 1.5 percent in April, the lowest level since the 1960s -- and Greenspan said the risk of a further drop in prices is greater than the risk of inflation.
Greenspan pointed to several factors that could fuel an economic rebound, including low interest rates, falling oil prices, an improving stock market, high productivity and the ability of homeowners to take advantage of low interest rates by refinancing their mortgages.
But he also said the economy's health ultimately will depend on companies deciding to expand their businesses with new investment and hiring.
"Firms still appear hesitant to spend and hire, and we need to remain mindful of the possibility that lingering business caution could be an impediment to improved economic performance," Greenspan said.
His testimony had little impact on U.S. stock prices, which fell in early trading. Treasury bond prices also fell.
To combat the effects of a recession and terrorist attacks in 2001, the Fed cut its target for its key short-term interest rate 11 times. It cut the rate again in late 2002, as a hesitant recovery seemed to weaken in the months leading up to a U.S.-led war with Iraq.
Since then, the Fed has repeatedly expressed cautious optimism and said any weakness in the economy likely was due to uncertainty in the walk-up to war. Once these "geopolitical uncertainties" were gone, the Fed hoped, businesses would make long-term planning and hiring decisions, goosing the economy.
But economic data after the war have continued to disappoint, leading some economists to wonder if the Fed will be forced to cut rates again at its next policy meeting, scheduled for June 24-25.
Greenspan's testimony, however, gave little indication that he is any more worried about the economy than he was before the May 6 policy meeting, when the Fed left rates alone.
"[His testimony] leaves us thinking that a June 25 easing is far from a done deal -- it will depend on the data," said Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd.
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