--Greenspan: Retrenchment may be short if productivity rise lasts
--Greenspan: Exceptional econ weakness did not persist in January
--Greenspan: Weakness in late 2000 may have been weather-related
--Greenspan: Inventory "rebalancing appears to be in progress"
--Greenspan: Strong profit forecasts "bode well" for productivity
--Greenspan: Unclear how much of inventory adjustment is complete
--Greenspan: Technology speeding pace of US economic adjustments
--Greenspan: Mkt conditions better, but some nervousness remains
--Greenspan: Fed was aggressive because inflation subdued
--Greenspan: Confidence now at level consistent with US econ growth
--Greenspan: Wariness on hi-tech investments may last a while
--Greenspan: Further energy price drops would help boost demand
--Greenspan: No "broad" inflation impact from energy price rise
--Fed weighing use of state, foreign debt for repos, Greenspan says

By Edward Kean and Deborah Lagomarsino, BridgeNews Washington--Feb. 13--Although the risks of economic weakness "predominate" for the near-term, the current "retrenchment" in US economic activity "will presumably be limited" if the forces boosting U.S. productivity growth remain intact, Federal Reserve Chairman Alan Greenspan said Tuesday.
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In prepared remarks to the Senate Banking Committee, Greenspan said the "exceptional economic weakness" at the end of last year apparently did not persist in January. Moreover, the weakness in some indicators late last year may have reflected adverse weather, he said. In addition, consumer confidence, while lower, is at a level that has been consistent with economic growth in the past, he said.
"If the forces contributing to long-term productivity growth remain intact, the degree of retrenchment will presumably be limited. Prospects for high productivity growth should, with time, bolster both consumption and investment demand," he said. Greenspan said corporate profit projections for the long-term remain "elevated" and that bodes well for productivity growth.
Greenspan indicated that the inventory "rebalancing" now underway may be shorter than normal because technology have made firms cut their inventories quicker and in a more synchronized fashion, he said. If productivity growth remains strong and demand recovers, "excess inventories" would be eliminated "before long in this scenario," Greenspan said.
Greenspan's comments to the Senate panel come less than two weeks after the Fed cut its main short-term interest rate target by one-half percentage point in response to signs that the economic growth had weakened markedly. The Fed cut interest rates twice in January by a cumulative 1 percentage point in a bid to prevent the economy from sliding into recession.
Greenspan's remarks Tuesday seem less pessimistic than those he made a few weeks ago. On Jan. 25, Greenspan told Congress that economic growth had slowed dramatically and growth probably was "very close to zero." He reiterated today that growth around the start of 2001 may have come to a halt.
However, his somewhat more sanguine comments Tuesday on the economic outlook may cast doubt on how much further the Fed will lower interest rates.
Prior to today's testimony, financial markets were pricing in another one-half percentage point cut in rates at the Fed's March 20 meeting. To be sure, Greenspan acknowledged that economic weakness still is the main threat facing the economy.
"In addition to the possibility of a break in confidence, we don't know how far the adjustment of the stocks of consumer durables and business capital equipment has come," he said. While some financial market sectors have "improved in recent weeks, continued lender nervousness still is in evidence in other sectors," Greenspan warned.
Moreover, slowing foreign economies could hurt U.S. exports, he said. Greenspan stressed that the quicker economic adjustment of companies to weaker demand also has forced the Fed to "respond more aggressively" than the Fed traditionally has done in prior decades.
The Fed was able to be more aggressive in responding to economic weakness because "underlying cost and price pressures remained subdued," he said. The Fed's "front-loaded" rate cuts were unlikely to jeopardize the current "stable, low inflation environment," Greenspan stressed. Greenspan spent considerable time discussing the impact of higher prices on the economy.
He noted the rise in energy costs last year "does not appear to have had broad inflationary effects," contrary to prior episodes. Rather, the higher prices mainly hurt overall demand, he said. But if the additional energy price declines anticipated in futures markets occur, they would "tend to boost purchasing power and be an important factor supporting recovery in demand growth over coming quarters," Greenspan said.
Greenspan also briefly discussed the implications of swelling budget surpluses for the Fed's use of Treasury securities in its open-market operations. He disclosed the Fed is starting to study the possibility of acquiring, under repurchase agreements, additional assets the Fed is already authorized to buy. In particular, the Fed has asked its staff to look at possible ways "for backing our usual repurchase operations with the collateral" of certain municipal and foreign debt securities, he said. Doing this would "significantly expand and diversify the assets our counterparties could post in temporary open-market operations." End