The US Federal Reserve has the tools necessary, even with interest rates near zero, to stimulate an economy that is still trying to gain "traction," Federal Reserve Chairman Alan Greenspan said.
The recession that began in March last year was "very shallow," Greenspan told the Council on Foreign Relations. That means recovery has come more slowly than after past recessions.
Greenspan's Fed has cut interest rates 12 times since January last year in an effort to stimulate the economy. The US annual growth rate may slow to 1.6 percent this quarter from a 3.1 percent pace from July through September, according to the November Blue Chip Economic Indicators survey.
The recovery has also been slowed by a "very major fallback" in business investment as executives wait for an improvement and borrowing costs rise for many companies because of concern about corporate governance and "geopolitical risks" such as war in Iraq, the chairman said.
"There is a very large hurdle at this stage against making any capital investment," Greenspan said. "Nobody is doing anything, or I should say, most everybody is doing nothing."
That should change in the months ahead as stock prices rise and the situation in Iraq is clarified, he suggested.
"Short-term risks will fall and the large rates of return will then become very attractive," leading to more investment, he said.
Greenspan said last year's recession didn't create much contraction in the economy.
"If you didn't have much contraction, you don't have much traction going forward," he said.
While the Fed lowered the benchmark overnight bank lending rate Nov. 6 to 1.25 percent, the lowest in 41 years, that doesn't mean policy-makers are almost out of ammunition, he said.
If the Fed cut rates to zero and still needed to put additional money into the economy, it would buy securities with longer maturity dates "which, if we were at zero, would still be yielding quite a significant interest rate level," he said.
Greenspan pointed to the period between 1942 and 1951, when the Fed used a 25-year Treasury bond fixed at 2.5 percent. "We are very far from the Fed being restricted," the chairman said.
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