Greenspan expects gains in economy
By MARTIN CRUTSINGER
Associated Press

WASHINGTON — Federal Reserve Chairman Alan Greenspan told Congress Wednesday that he sees increasing signs the country's first recession in a decade is coming to an end. He cautioned the rebound this year is likely to be a subdued one.

Greenspan cited a variety of signs of strength in recent months, noting particularly strong gains in consumer spending. He said these hopeful signals led Fed policy-makers to call a cease-fire to their aggressive campaign of cutting short-term interest rates at their January meeting.

“In the past several months, increasing signs have emerged 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 told the House Financial Services Committee.

Delivering the Fed's semiannual economic forecast to Congress, Greenspan said the central bank expects the economy this year will grow by between 2.5 percent to 3 percent, when measured from the fourth quarter of last year. That would represent about half the pace of the normal rebound from a recession.

Greenspan's cautiously optimistic tone was in line with Wall Street expectations and the view of most analysts that while the Fed is probably finished cutting interest rates, it will not feel any need to raise rates, at least before the latter part of the year.

That will mean the federal funds rate, which the Fed pushed down to a 40-year low of 1.75 percent in a series of 11 aggressive rate cuts last year, will stay unchanged for a significant period of this year. Thus, short-term borrowing costs for millions of Americans will also be unchanged.

The prime rate, the benchmark for many business and consumer loans, which is now at a 36-year low of 4.75 percent, is expected to remain at that level at least until midyear.
Greenspan said he is looking for a subdued recovery because consumer spending, the normal driver for growth in the early months of a rebound, held up remarkably well last year, giving it less room to expand this year.

The recession, which began last March and was worsened by the Sept. 11 terrorist attacks, was shaping up as one of the mildest in U.S. history, Greenspan said.
He attributed this favorable outcome in part to advances in computer technology that give companies real-time information allowing them to adjust quickly to changing economic conditions.

“Crucially, the imbalances that triggered the downturn and that could have prolonged this difficult period did not fester,” Greenspan said.

Greenspan agreed with the view of private forecasters that this recession probably will be “a significantly milder downturn” than others in the post-World War II period.

Greenspan termed this development nothing short of remarkable, given the added shocks to the economy suffered with the Sept. 11 terrorist attacks.

“If ever a situation existed in which the fabric of business and consumer confidence both here and abroad, was vulnerable to being torn, the shock of Sept. 11 was surely it,” Greenspan said.

Addressing the largest corporate bankruptcy in U.S. history, Greenspan said the collapse of energy giant Enron Corp. underscores how fragile companies can be when their main business rests not on the number of factories they own producing real goods but on the production of less tangible services, such as energy trading.

In response to questions, Greenspan said he did not believe Enron's collapse would have any long-run impact on the economy but he said it did point to the need for tougher regulations to restore investor confidence in corporations' books.

credits

TCU Daily Skiff © 2002