Federal Reserve chairman Alan Greenspan will seek to calm congressional concern over recent market turmoil in the wake of a series of big corporate scandals when he testifies before the Senate banking committee Tuesday, analysts said.
Greenspan is expected to appear before the committee at 10am US time today to deliver the Fed's semi-annual report on monetary policy and his usual brief economic forecast.
The slide in stock and currency markets follow corporate accounting scandals involving Enron, Arthur Andersen, Xerox, WorldCom and others.
"The risk is if you have continued financial distress, clearly that's going to hurt consumption and investments and would trigger a new recession," said John Silvia, chief economist of Wachovia Securities.
Consumption is the main motor of growth for any economy, he said.
Last week the Dow Jones industrial average, the best-known Wall Street index, plummeted 7.4 percent. It has lost 20 percent of its value since March.
Likewise, Standard &Poor's 500, recognized as a more representative sampling of New York Stock Exchange stocks, fell 6.8 percent last week alone.
Some 80 million Americans have their retirement funds tied up in the stock market. Those 80 million are expected to rein in their spending to make up for value lost from their retirement portfolios.
In the face of such economic turmoil, Greenspan will likely "reassure investors that Fed policy will counter any drag from falling equity prices and continue to foster a return of full employment," said JP Morgan economists in a research note.
He could also say, as he has in his congressional testimony since February, that "the near-term outlook is clouded ... by weak stocks prices, soft business investment and uneven foreign growth," according to David Gilmore, partner at Foreign Exchange Analytics.
Richard Rippe, chief economist, Prudential Securities, said: "I think he will reaffirm the Fed's intention to remain accommodative [until they] achieve a sustainable growth rate in final demand."
The principal interest rate manipulated by the Fed, the overnight rate, has been at 1.75 percent since December, its lowest level in 40 years.
Besides delivering his report on the health of the US economy, Greenspan will surely take advantage of the intense media coverage that usually surrounds such hearings, to reassure US investors and the public that the US financial system remains solid despite the recent scandals, said Silvia.
Consumer confidence fell the most this month since terrorists attacked New York and Washington, as flagging trust in U.S. companies hammered stocks and threatened the economic recovery.
The University of Michigan's preliminary index of consumer sentiment for July sank to 86.5, an eight-month low, from 92.4 in June. The index had dropped almost 10 points in September.
Bristol-Myers Squibb Co last week joined a list of companies whose accounting is under federal scrutiny.
``There is a heightened risk that the troubles in the stock market will bleed over into the real economy,'' said Stephen Stanley, an economist at Greenwich Capital Markets Inc. in Greenwich, Connecticut.
Consumer spending supports two-thirds of the economy, which is why investors are watching for any spillover from the stock decline. That hasn't happened so far. US retail sales rose 1.1 percent in June, the Commerce Department reported. Shoppers stepped up purchases of cars, clothing and appliances in the same month confidence also fell. Sales had dropped 1.1 percent in May.
That's not the only sign of health in the broad economy.
General Electric Co, which makes products from light bulbs to jet engines and owns the NBC network, said third-quarter earnings will jump as much as 25 percent from a year earlier. Dell Computer Cor., the world's second biggest maker of personal computers, boosted its sales and profit forecasts.
Economists had expected a reading of 93 in the preliminary index, which is based on a phone survey that will ultimately include about 500 households.
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