The US economy shows signs of continued weakness and the Federal Reserve is prepared to lower interest rates again if growth doesn't pick up soon, Fed Chairman Alan Greenspan said.
``We aren't free of the risk that economic weakness will be greater than currently anticipated, and require further policy response,'' Greenspan told the House Financial Services Committee.
Additional rate reductions probably would be limited, he suggested, because the central bank has already cut the benchmark overnight lending rate to 3.75 percent, the lowest in seven years.
The Fed forecast the economy will expand as much as 2 percent in 2001 and more than 3 percent in 2002, as a rebound starts to take effect late this year -- boosted by six Fed interest-rate cuts and a reduction in income taxes. Using the Fed's measure of growth, the economy expanded 3.5 percent last year.
"The rate of deterioration is clearly slowing and indeed there is considerable evidence to suggest we are approaching stability at a lower level," Greenspan said.
In his February testimony to Congress, Greenspan said the economy had performed better in the first two months of the year than in late 2000 and consumer spending had held up better than expected. Even so, he said then, the slowdown had "yet to run its full course," and the economy was "on a track well below the productivity-enhanced rate of growth of its potential." Since February, central bankers have cut interest rates four times in an effort to prevent a recession. Greenspan said on Wednesday the economy was more at risk five months ago than it is now.
"Despite all the shocks that are involved in both the domestic and international economy, our economy is still doing, not well, but clearly far better given what has happened, than I would have forecast six, eight, nine months ago," he said.
US Treasury securities rose in response to expectations of lower interest rates.
The 10-year Treasury note increased 3/4 point, pushing down its yield 10 basis points to 5.10 percent, the lowest in more than three months.
Over the past six months, the Fed's policy-making Open Market Committee has cut the overnight rate by 2 3/4 percentage points.
As a result, market interest rates have fallen, the money supply is rising, and recent economic statistics "have turned from persistently negative to more mixed," Greenspan said.
Trading in federal funds futures contracts suggests investors expect a quarter-point rate cut at the Fed's Aug. 21 policy meeting.
Greenspan told Congress that inventories for most products other than telecommunications equipment are shrinking. Coupled with falling energy prices and US$300 rebate checks going out starting today to every taxpayer, that should provide the stimulus the economy needs, he said. Greenspan emphasized that consumer spending has risen this year, assisted by an increase in home equity.
If those monetary and fiscal policies don't do enough to stimulate growth, the FOMC has scope to move again because inflation is not a problem now, Greenspan said.
High energy prices, which cut business and consumer purchasing power earlier this year, are now falling, as are prices for many raw materials. Competition still prevents most businesses from raising prices, he said, and with unemployment rising, labor costs are falling.
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