|
Worst seems over: Greenspan
|
 |
January 24, 2002: 12:49 p.m. ET
Fed chairman tells Congress economy starting to recover; risks remain.
|
NEW YORK (CNN/Money) - Federal Reserve Chairman Alan Greenspan expressed optimism Thursday about the U.S. economy's chances for recovery, contrasting somewhat with his remarks earlier this month but still pointing out the risks to a runaway recovery.
"There have been signs recently that some of the forces that have been restraining the economy over the past year are starting to diminish and that activity is beginning to firm," Greenspan said in remarks prepared for delivery to the Senate Budget Committee.
Wall Street analysts were following Greenspan's remarks carefully, looking for clarification of comments he made earlier on Jan. 11 that seemed to indicate he was much more pessimistic about the economy's health than investors were.
In a surprising display of reflection, Greenspan said Thursday he thought he should have phrased his Jan. 11 speech differently. His goal, he said, was simply to say the economy was stabilizing without trying to be overly optimistic.
"That created, unfortunately, phraseology -- which, in retrospect, I should have done differently -- that implied I didn't think the economy was in the process of turning, and I tried to rectify that in today's remarks," he said.
At the time, many observers took his remarks to mean that the Fed was likely to cut interest rates again at its next policy meeting, scheduled for Jan. 29-30. After his remarks Thursday, economists began to change their minds.
"Greenspan's testimony was balanced," Merrill Lynch chief economist Bruce Steinberg said. "We believe today's remarks were enough to think that the Fed will take a 'wait and see' attitude rather than ease one last time."
Wall Street, encouraged by the rosier outlook, sent stock prices higher as Greenspan spoke, while Treasury bond prices fell.
Among the positive signs Greenspan mentioned in his speech, businesses are working off their inventories of unsold goods, freeing them to increase production and hire more workers, leading to increased consumer spending.
As he did earlier in the month, however, Greenspan also pointed out that the rally in production could be short-lived if demand doesn't increase to match it.
"Through most of last year's slowdown, in contrast to the usual pattern, the household sector was a major stabilizing force," Greenspan said. "As a consequence, although household spending should continue to trend up, the potential for significant acceleration in activity in this sector is more limited."
Also weighing on a surge in consumer spending, Greenspan said, could be an unemployment rate rising toward 6.0 percent. But weekly jobless claims appear to have peaked, and the rate of unemployment could slow down, Greenspan said.
And, if job cuts lead to higher productivity, that could boost people's wages and standards of living, tempering the negative effects of a weaker labor market, Greenspan said.
To help boost consumer spending and sow the seeds of recovery from a recession that some economists think began in March 2001, the Fed cut its target for short-term interest rates 11 times in 2001.
Though economists are still divided about what the Fed will do after its policy meeting, more now agree that Greenspan's caution might be a hint that the Fed plans to take longer to start raising rates again than the markets once thought.
Click here for more on the Fed and rates
Some Senators grilled Greenspan about his comments early in 2001, before the recession began, that seemed to offer support to President Bush's plan for a tax cut. Congress approved a tax cut in the summer, but the "rebate" checks that were part of that legislation did little to spur consumer spending, and the Sept. 11 attacks worsened an already recessionary economy.
Suddenly, the government returned to deficit spending, and many Democrats said the tax cut was a bad idea that needed to be repealed.
But Greenspan was unremorseful about the tax cut, saying it may have helped temper the impact of the recession.
Greenspan acknowledged that economic weakness and the response to the Sept. 11 terrorist attacks had put a huge dent in the government's budget. A year ago, the Congressional Budget Office projected a $5.6 trillion budget surplus between 2002 and 2011, Greenspan said, a projection that's been reduced by about $4 trillion recently. The White House's budget office said Wednesday that it expected budget deficits until the year 2005.
Still, Greenspan was relatively sanguine about the budget, saying the government's fiscal health was better than it was a decade ago, when policy makers wrestled with chronic deficits.
But he also pointed out that, with the number of retirement-age Americans swelling in the years after 2010, the budget would face "formidable" pressure. Though he said he thought Social Security would always be safe, he encouraged policy makers to make future tax cuts and spending plans conditional upon specific budget surplus targets.
'Conflicted' about stimulus package
In response to a Senator's question, Greenspan said he was "conflicted" about whether or not the economy still needed a fiscal stimulus package from Congress. President Bush and other Republicans wanted such a package last year, but Democrats disagreed with the plan the Republicans submitted, and the year ended without a bill.
"While, three months ago, it was clearly a desirable action ... we didn't [pass a stimulus bill]," Greenspan said. "Fortunately it turned out we didn't need that particular [action]."
Looking forward, Greenspan said he wasn't certain the benefits of a stimulus package -- which Bush still supports -- will outweigh the negative impact of such a package on the tentative budget surplus.
"The stimulus issue is a difficult one at this particular stage," he said, adding, "I think the economy will recover in any event."
White House press secretary Ari Fleischer responded to Greenspan's prepared remarks by pointing out the risks the Fed chairman mentioned and said President Bush still wants a stimulus package, according to a Reuters report.
Greenspan addressed another hot-button political issue, the collapse of Enron Corp. While he thought the company's apparent efforts to hide its true financial standing were "egregious" and revealed flaws in the current system of corporate accounting, he didn't think its bankruptcy and the associated scandal would have a great impact on the economy. 
|
|
|
|
|
|
|
