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Thu, May 22, 2003 - Page 12 News List

Reserve chairman emphasizes strong second-half growth


US Federal Reserve Chairman Alan Greenspan may downplay mixed economic reports since the end of the Iraq war and reassert his optimism about stronger growth in the year's second half to the US Congress today, economists said.

"Greenspan hasn't received enough information about the postwar activity to ditch his basic forecast that the economy will get better in the second half,'' said Nancy Roman, president of G7 Group Inc, an economic advisory firm whose clients manage more than US$100 billion.

``He will play down fears of imminent deflation, while leaving the door open for additional rate cuts if the economy weakens," she said.

Greenspan and other Fed policy makers on May 6 kept its benchmark interest rate at 1.25 percent, the lowest since 1961, saying growth may accelerate later this year now that fighting has ended in Iraq. The Federal Open Market Committee that Greenspan leads also cautioned that growth might be threatened by "unwelcome" further declines in inflation.

Investors are betting the Fed is concerned enough about the second scenario to cut the interest rates, lest slowing inflation turn into an actual decline in prices and deepen an economic slump.

Benchmark 10-year Treasuries had their biggest gain in eight weeks on Tuesday, as the 3 5/8 percent note due in May 2013 rose 1 point at 5:31pm in New York. Its yield fell as much as 13 basis points to 3.35 percent, the lowest since 1958.

Traders who make markets in futures contracts on the overnight lending rate fully expect the central bank to reduce rates by 0.25 percentage points on June 25. Futures contracts for July delivery have an implied yield of 0.99 percent.

The Fed chairman was to speak before the Joint Economic Committee of Congress yesterday at 9:30am.

Greenspan told the House Financial Services Committee on April 30 that he expected the economy to expand at a "noticeably better pace" following the end of the conflict in Iraq earlier that month.

The economy grew 1.6 percent at an annual rate in the first quarter, and the rate may increase to 3.8 percent in the year's final three months, based on the median economist forecast in a Bloomberg News economist survey.

Since the chairman last spoke to Congress, "activity data have continued to be mixed and disinflation has accelerated," wrote Peter Hooper and Joseph Lavorgna, US economists at Deutsche Bank Securities.

Consumer confidence has risen and oil prices have declined since the fighting subsided, and the Standard & Poor's 500 Stock Index is up 8.4 percent since March 31. Congress is preparing to pass a tax-cut package valued at US$350 million to US$550 billion, and monetary policy has kept borrowing costs low for businesses and consumers.

Still, there are risks. Factory use is declining and that American companies aren't doing much hiring. Without much demand, companies have to cut prices.

"Overall demand right now is tepid," said Carl Tannenbaum, chief economist at ABN Amro North America Inc in Chicago.

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