An economic recovery that's just beginning may not have enough strength to endure, Federal Reserve Chairman Alan Greenspan said, suggesting to investors and economists that he remains open to cutting interest rates for the 12th time in 13 months.
"Despite a number of encouraging signs of stabilization, it is still premature to conclude that the forces restraining economic activity here and abroad have abated enough to allow a steady recovery to take hold," Greenspan told the Bay Area Council Conference in San Francisco.
"I would emphasize that we continue to face significant risks in the near term," he said in the first speech on the economy he's given since October.
US Treasury yields fell as the Fed chairman's remarks boosted investor optimism that policy makers may reduce their benchmark interest rate from a 40-year low of 1.75 percent when they meet at the end of the month.
"This is telegraphing that there will be another cut in interest rates," said Sung Won Sohn, chief economist at Wells Fargo Co in Minneapolis.
"He sees the recovery proceeding in fits and starts rather than at a steady pace."
Business profits and investment "remain weak," Greenspan said. Rising unemployment and stock prices still below their highs of the past two years may restrain consumer spending.
Markets react
The 5 percent note maturing in August 2011 rose 3/4 point, pushing down its yield 12 basis points to 4.86 percent following Greenspan's remarks.
Stocks fell on concern the recovery would be delayed. The Dow Jones Industrial Average dropped 80 points, or 0.7 percent, to close at 9,987.53. The NASDAQ Composite Index fell 25 points, or 1.2 percent, to close at 2,202.46.
The economy fell into recession in March and contracted at a 1.3 percent pace in the third quarter of last year. It will probably grow at a 0.7 percent annual rate in the first three months of this year after contracting at a 1 percent pace in the fourth quarter, according to the January Blue Chip Economic Indicators survey of more than 50 economists.
There are "tentative indications that the contraction phase of this business cycle is drawing to a close," Greenspan said.
"Arguably, our economy has not been weakening cumulatively in recent weeks."
Recent economic indicators have been ``more mixed'' lately, with inventories falling at an "extraordinary" pace, he said.
"With production running well below sales, the potential positive effect of the inevitable cessation of inventory liquidation on income and spending could be significant," Greenspan said.
Stable prices
Also, industrial commodity prices have been stable in recent weeks, and semiconductor prices have firmed, he said. Low mortgage rates and good weather have spurred home sales. And automobile sales, though down from October and November incentive-induced highs, "have remained surprisingly resilient," he said.
"But that impetus to activity will be short-lived unless the demand for goods and services itself starts to rise," Greenspan said.
A number of factors are working against a pickup in demand, he said.
Mortgage rates have been rising in recent weeks, and that "is likely to damp housing activity and equity extraction," he said. The pace of home refinancing has "dropped noticeably'' as rates have risen.
While declining oil and gas prices have "clearly provided support" for consumer spending, they will provide "only a one-shot boost to consumption, albeit one that is likely to take place over time," he said.
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