Federal Reserve Chairman Alan Greenspan said he's confident the US economy will expand at a faster pace, suggesting it's not necessary to reduce interest rates to provide an additional spark.
"I continue to believe the economy is positioned to expand at a noticeably better pace than it has during the past year, though the timing and the extent of that improvement remains uncertain," Greenspan said in testimony to the US House of Representatives' Financial Services Committee.
Investors focused on his comments that lower business confidence and spending may be "an impediment" to improvement.
Treasury yields fell after a report on Wednesday showed Chicago-area manufacturing contracted for a second month, dimming expectations for a national factory survey yesterday and today's jobs report.
"The Fed will be more likely to adopt a balance-of-risks statement tilted toward weakness than cut interest rates" at its May 6 policy meeting, said John Ryding, chief market economist at Bear Stearns Inc in New York.
The testimony is "leaving the door open to cutting rates further later in the year if the data do not show the expected pickup," he said.
The Fed held four conference calls of all members of the Federal Open Market Committee to monitor the economy during the Iraq conflict, spokeswoman Michelle Smith said.
Greenspan said staff members are conducting a daily review of financial markets and business conditions and that statistics since the end of fighting in Iraq have been "mixed."
While consumer confidence appears to be rising, "reports from businesses have not exhibited a similar improvement in tone," Greenspan said.
About the time Greenspan began testifying, the National Association of Purchasing Management-Chicago said its factory index fell to 47.6 from March's 48.4 and was the weakest since October.
An index of new orders fell to the lowest since October 2001, the month after the terror attacks. Readings below 50 indicate the manufacturing economy is generally declining, and readings above 50 show expansion.
US GDP expanded at a 1.6 percent annual rate in the first three months of this year, following growth of 1.4 percent in the fourth quarter of last year, the slowest half-year since the second half of 2001.
In testimony to the same panel in February, Greenspan said Fed officials forecast the economy would grow at a 3.25 to 3.5 percent pace this year.
"We need to remain mindful of the possibility that lingering business caution could be an impediment to improved economic
performance," Greenspan said.
The price of the benchmark Treasury due in February 2013 rose about 3/4 point, pushing its yield down 9 basis points to 3.84 percent at 4:48pm in New York. The Dow Jones Industrial Average declined 23 points, or 0.3 percent.
"Greenspan seems to be a bit more downbeat than we would have thought," said David Rosenberg, chief North American economist for Merrill Lynch & Co.
Greenspan's comments that businesses aren't gaining confidence "suggests that he may have a read" on (yesterday's) April factory report from the Institute of Supply Management, Rosenberg said.
The ISM index may show that manufacturing contracted for a second straight month, based on the median estimate in a Bloomberg News economist survey.
With first-time jobless claims still running above 400,000 a week, companies are finding they can meet "tepid" demand with a "leaner" workforce, Greenspan said.