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.
Initial claims are expected to fall to 430,000 in yesterday's report from 455,000, and today the Labor Department may say that the economy lost 60,000 more jobs in April and that the unemployment rate rose to 5.9 percent, based on median forecasts.
"Chairman Greenspan's testimony makes two things clear: The Fed is willing to accept a weak payroll report this Friday [today] ... [and] is not in a rush to judgment on the economy," said Drew Matus, a senior economist at Lehman Brothers Inc.
Rising stock prices and lower yields in the corporate bond markets have helped lower the cost of capital, he said.
That "would seem to suggest a turnaround in capital spending," Matus said.
A drop in oil prices will also help profit margins, he said.
Greenspan called a rising backlog of orders for non-defense capital goods excluding aircraft, a proxy for business investment, "modestly encouraging."
Greenspan issued a warning on disinflation, suggesting that more erosion of companies' pricing power may prompt interest rate cuts.
On March 18, Fed policy makers voted to keep the benchmark overnight bank lending rate at a 41-year low of 1.25 percent.
"Substantial further disinflation would be an unwelcome development, especially to the extent it put pressure on profit margins and impeded the revival of business spending," he said.
An earlier draft of Greenspan's testimony included more detail on sources of disinflation: "The recent retreat in energy prices, coupled with strong growth in productivity, implies additional downward pressure on inflation," the draft said, according to spokeswoman Smith.
The paragraph, however, was omitted from the final version.
When asked by members of Congress about President George W. Bush's proposed tax-cut plan, Greenspan said "I find much to support in the president's program, provided that it is matched by cuts in spending."
The White House is pushing for US$550 billion in tax cuts over 10 years, while the Senate budget resolution calls for US$350 billion.
In February, the Fed chairman forecast the economy would pick up once the situation in Iraq was clarified. Fed officials' feeling, he said at the time, was that the economy had been performing about as they had expected, with final sales slowing and soft business spending as companies kept inventories lean and concern about accounting scandals restrained investors. On top of that came talk of war.
At their March 18 meeting, Fed officials for the first time declined to characterize the outlook for the economy because of uncertainty over the Iraq war.
Some analysts say the Fed may stop the practice of issuing outlooks in the statements following policy meetings because it has been a cumbersome tool that some Fed officials oppose.
"The balance of influences on inflation and economic activity will be among the subjects of discussion by the Federal Open Market Committee when it meets in six days," Greenspan said.
The chairman's comments, billed as a "continuation" of his appearance before the House panel in February, reflected the views of all 19 members of the central bank's rate-setting Open Market Committee and not just his own, Greenspan said.
The Fed chairman is required to present testimony to the banking committees of the House and Senate in February and July.
Greenspan's February testimony to the House panel concluded without all members having had a chance to ask questions, and he promised at the time he would return for another session.