Greenspan sees signs of recovery

Falling inventories may yield significant boost to growth

Rate cut seems unlikely

Efforts in Congress to spur economy called `wrong' step

January 25, 2002|By BLOOMBERG NEWS

WASHINGTON - The U.S. economy is beginning to show signs of recovering from recession, and a rapid reduction in unsold goods may result in a "significant" boost to growth, Federal Reserve Chairman Alan Greenspan said yesterday.

"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 told the Senate Budget Committee.

"With production running well below sales, the potential positive effect on income and spending of the inevitable cessation of inventory liquidation could be significant," Greenspan said.

Stocks rose after the Fed chairman's remarks, which investors interpreted as more positive than those he made in San Francisco two weeks ago.

Since that speech, economic statistics have shown improvements in consumer confidence and in manufacturing in the Philadelphia area.

Applications for unemployment benefits fell last week to a six-month low.

Yesterday's testimony led economists and investors to predict that the policy-making Federal Open Market Committee won't reduce its benchmark interest rate a 12th time in 13 months when it meets next week.

"He is dramatically more optimistic about how he reads the current situation and he is also much more balanced in how he views the risks," said Stephen Stanley, an economist at Greenwich Capital Markets Inc. in Greenwich, Conn.

"This clearly gets across the point that the Fed is not going to" reduce the overnight bank lending rate when it meets Tuesday and Wednesday. The rate is at a 40-year low of 1.75 percent.

The San Francisco speech Jan. 11, in which Greenspan said the economy faces "significant risks in the near term," had convinced analysts and investors that another rate reduction was likely.

Yesterday, Greenspan dropped the warning of risk and instead listed "pluses and minuses' in the economy's outlook, emphasizing the positive effect of mortgage rates and an improving outlook for employment.

"The markets have been assuming a far more rapid snapback than I frankly think is likely to happen, largely because we haven't gone down very far," Greenspan said in explaining his shift in tone during a question-and-answer session with senators.

"That created, I think, a phraseology which, in retrospect, I should have done differently, which sort of implied that I didn't think the economy was in the process of turning. And I tried to rectify that in today's remarks," the Federal Reserve chairman said.

The Dow Jones industrial average rose 65 points, or 0.7 percent, to close at 9,796.07. The Nasdaq composite index rose 20 points, or 1.1 percent, to close at 1,942.58.

Most analysts see gross domestic product expanding by the second quarter.

The economy shrank in the third quarter at a 1.3 percent annual rate and probably contracted in the final three months of last year and the first three months of this year, economists say.

"We are, just at this particular point, turning as best I can judge," Greenspan told senators. "In other words, we are close to zero GDP change."

In answering senators' questions, the Fed chairman defended his endorsement last year of a tax cut to prevent the expected budget surplus from becoming too large.

Greenspan said an unexpected benefit was that the tax measure limited the effects of the recession: "The evidence of consumer markets in August and even early September was that there was some impact of that."

Greenspan also said it isn't necessary for Congress to pass an economic stimulus bill this year. President Bush will ask for a $90 billion plan in his budget request Feb. 4, the administration said yesterday.

"It is conceivable that we may need some additional stimulus, which would be helpful, coming into effect in the spring or summer or something of that timing," he said.

"I'm looking at the fact we do have a budget which is very close to balanced and any stimulus program will clearly put us into deficit and go in the wrong direction."

"I do not think it is a critically important issue to do," he said.

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