The Federal Reserve's decision to lower the benchmark US interest rate last week should help the US economy work its way through a "soft patch," Fed Chairman Alan Greenspan said.
A slower-than-expected pickup in business spending, concern about corporate malfeasance, falling stock prices, and "geopolitical risks" are weighing on the economy, Greenspan said in the text of testimony to the Joint Economic Committee of Congress.
"Over the last few months, these forces have taken their toll on activity, and evidence has accumulated that the economy has hit a soft patch," Greenspan said. "It was in this context that the Federal Open Market Committee further reduced our target federal funds rate last week." The central bank's Open Market Committee, which sets interest rate policy, voted Nov. 6 to lower the benchmark overnight bank lending rate by a half percentage point to 1.25 percent, the lowest in 41 years. The rate cut was the first this year, and the 12th consecutive since the Fed first began trying to stimulate the economy at the beginning of 2001.
The rate cut "should prove helpful as the economy works its way through this current soft spot," Greenspan said.
Business spending, vital to a sustained economic recovery, hasn't picked up as fast as expected, the Fed chairman said.
"There have been few signs of any appreciable vigor" in investment, he said. That should change as the economy picks up speed, because companies will continue to reap benefits from spending on computers and other technology that boosts productivity.
The increase in the rate of worker output per hour "has not yet faltered," Greenspan said.
Household spending has "slowed over the course of the year but has not slumped as some had earlier feared it might," he said. Tax cuts, extended unemployment benefits, and a surge in home refinancing have provided support to spending, he said.
At the same time, the slump in stock prices has cost Americans more wealth than they have accumulated in home equity, and "this net wealth erosion has continued to weigh on household spending." The drop in stock values has also slowed business spending.
"In financial markets, risk spreads on both investment-grade and non-investment-grade securities have widened," he said, increasing the cost of business borrowing.
Before his speech yesterday, pundits were saying Greenspan may tell Congress in his speech that the economy is ripe for a moderate recovery next year. They argued that the nation's business leaders might need more convincing.
Four other officials outlined parts of the Fed's strategy in speeches yesterday, including a statement by Federal Reserve Bank of Philadelphia President Anthony Santomero that lower rates may help the economy expand by 3 percent to 4 percent next year.
US chief executives would have the Fed cutting such forecasts by almost half. More than two-thirds of chief executives surveyed by the Business Roundtable expect growth to come in at less than 2 percent in 2003. While lower interest rates have helped businesses lower borrowing costs and put them in a position to buy new equipment and hire workers, many are holding off, and the threat of conflict with Iraq isn't helping.
"Inflation is under control. Interest rates are under control. Unemployment is stable at 5.7 percent," said J.T. Battenberg, chairman and CEO of Delphi Corp, the world's largest auto-parts manufacturer. "But there's still tremendous amount of uncertainty out there as it relates to the potential war."
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