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Rate cut on the radar screen
July 18, 2001: 3:46 p.m. ET

Greenspan says U.S. economy not out of woods, could need more rate cuts
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NEW YORK (CNNfn) - The U.S. economy is still weak and may need another interest-rate cut to recover, Federal Reserve Chairman Alan Greenspan said Wednesday.

"The period of sub-par 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 U.S. House Financial Services Committee in his twice-yearly report on the economy.

In an effort to stave off recession, the Federal Reserve has slashed its target for short-term interest rates six times this year, from 6.5 percent to 3.75 percent, the most aggressive credit-easing campaign in nearly two decades.

Greenspan expressed hope that the Fed's rate reductions, along with falling energy costs and soon-to-be mailed tax-rebate checks, will bolster economic growth in the coming months.

"We need ... to be aware that our front-loaded policy actions this year, coupled with the tax cuts under way, should be increasingly affecting economic activity as the year progresses," Greenspan said.

Still, many observers said the comments from the normally tight-lipped Greenspan were a rare hint that the Fed is likely to cut rates again when it meets on August 21.

"He seems to be more forthright in seeing a willingness to cut interest rates in the future than expected," said Alan Ruskin, research director at 4Cast Ltd. "It is uncharacteristically blunt."

Many economists expect the Fed to cut rates by another quarter of a percentage point in August.

"This greatly increases the odds of another [quarter-point] rate cut at the August meeting," said David Jones, chief economist at Aubrey G. Lanston. "I expect funds to be somewhere between 3 and 3.5 percent by the end of the year."

U.S. stocks were falling before the testimony and stayed low all day, as a new wave of weak earnings reports coupled with Greenspan's remarks made investors worry that companies may face a prolonged period of soft profits. In fact, Greenspan said "pressures on profit margins have been unrelenting."

U.S. Treasury bond prices rose on increased hopes of another interest-rate cut.

Inflation in check

Greenspan's testimony came soon after the government reported consumer prices, its chief measure of inflation, rose slightly in June, passing economists' expectations.

One of the reasons the Fed has been able to cut interest rates as much as it has, Greenspan said, is because inflation is well contained. That should continue, given that energy prices are starting to fall.

"While actual CPI inflation has picked up this year, this rise has not been mirrored uniformly in other broad price measures," Greenspan said.

And until there is more evidence that businesses have finished selling their backlog of goods and companies start spending more, "the risks would seem to remain mostly tilted toward weakness in the economy" rather than inflation, Greenspan said.

Much of the economic slowdown comes from businesses rapidly and sharply cutting back on production in the face of sagging demand. Companies have laid off workers, trimmed hours, and deeply discounted merchandise to work off excess inventories.

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Economic upheaval in other countries, coupled with rising energy prices last year into this year, intensified the slowdown and drained businesses' and consumers' purchasing power, Greenspan said.

Consumers, whose spending accounts for two-thirds of all economic activity, have been a main force keeping the economy afloat, but there are downside risks to consumer spending in the next few quarters, Greenspan said.

Fed policy-makers have lowered their forecast for economic growth this year, as measured by the Gross Domestic Product. The range of economic growth in 2001 is now forecast between 1 percent and 2 percent, rather than 2 percent-to-2.75 percent. They predicted the economy would rebound to a stronger rate of growth in the range of 3 percent-to-3.5 percent in 2002.

Despite the gloomy outlook, Greenspan said "the rate of deterioration" in economic activity was slowing and that growth should begin to pick up toward the end of the year.

"We've come a long way through this adjustment process and we're still standing and that's good news," Greenspan said, adding the economy "is still not doing well but (is) far better given what has happened than I would have forecast six, eight, nine months ago." graphic

- from staff and wire reports


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Greenspan's testimony

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