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Greenspan: risk continues
July 24, 2001: 12:08 p.m. ET

Fed Chairman repeats warning that more rate cuts may be necessary
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NEW YORK (CNNfn) - Federal Reserve Chairman Alan Greenspan repeated his warning Tuesday that the U.S. economy still faces a risk of weakness and that more interest-rate cuts may be necessary.

Speaking before the Senate Banking Committee, Greenspan delivered the same prepared remarks he made to the House Financial Services Committee last week.

In his testimony, he said economic indicators had turned from "persistently negative to more mixed," a positive development, but warned there were still considerable risks that the U.S. economy may get worse before it gets better.

"The period of subpar 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 said.

In an effort to keep money flowing in the U.S. economy and avoid a recession, the Fed has cut its target for short-term interest rates six times this year, from 6.5 percent to 3.75 percent.

Fed policy makers are scheduled to meet on Aug. 21, and many economists think they will cut rates again, most likely by a quarter-percentage point, especially after Greenspan's surprisingly pessimistic testimony last week.

As Greenspan answered Senators' questions Tuesday, U.S. stocks fell, but mostly in reaction to corporate profit woes. Interest-rate-sensitive U.S. Treasury bond prices were little changed.

Monetary policy still effective?

In his testimony, Greenspan again expressed hope that the Fed's actions, falling energy costs and tax-rebate checks many of which are already in the mail will bolster the economy.

"(O)ur 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.

The economy slowed, Greenspan said, when businesses sharply cut production and spending on computers, factories and other capital goods in response to sagging demand.

The Fed's aggressive rate-cutting campaign this year its most aggressive since the last recession hasn't prompted a dramatic turnaround in the economy, leading Sen. Paul Sarbanes, D-Md., to ask Greenspan if monetary policy was still effective.

"The complexity of our economy is such, and the way liquidity flows through the system is such, that you essentially get very complex differences in the way monetary policy plays out," Greenspan responded. "But, at the end of the day, it does seem to be effective."

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The U.S. economy grew at a 1.2 percent annual rate in the first quarter and most analysts expect that rate to fall below 1 percent when second-quarter figures are released Friday.

Greenspan also repeated his belief that neither monetary policy nor recent tax cuts are fueling inflation.

"All of our measures suggest fairly firmly that inflation is being contained," the Fed chairman said.

Addressing financial upheaval in Argentina and other countries, Greenspan said "the tinder out there is much less" than in the global financial crises that started in 1997 and eventually led the Fed to slash interest rates.

"The problems that we have seen are, in one sense, more domestic than they are international," Greenspan said. graphic

-- from staff and wire reports


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Greenspan's remarks to the House Financial Services Committee

Federal Reserve

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