---- By ANNA BOEKSTEGEN ----
WASHINGTON (AFX) - Federal Reserve board chairman Alan Greenspan indicated his willingness to keep the the current economic downturn from worsening with a further 50 basis point rate cut at the next FOMC meeting on March 20, economists said.
However, they noted that the Fed chairman, during his testimony on the state of the economy to the Senate Banking Committee, was relatively upbeat on the longer-term economic outlook, making any inter-meeting rate move unlikely.
"Greenspan was fairly clear that he expects economic retrenchment to continue for some time. Current risk is tilted to weakness and that makes a further easing very likely," said Nomura Securities deputy chief economist Carol Stone.
She is expecting the Fed to cut its key interest rate by 50 basis points at the March 20 meeting and by a further 50 points between May and June.
"Like us, Greenspan also seems to believe there will be a rebound in the second half of the year, when the effect of the January rate cuts feed through to the economy," she added.
In his testimony, which was rated as being among the least revealing and most non-committal ever delivered, Greenspan said it is "just a matter of time" before the economy returned to strong growth. He said the economy will not return to the "turgid" growth rates that characterised the 1970s and 1980s.
Robert Brusca, president of Ecobest, argued that, by and large, Greenspan's opinion of the economy is that "it will be all right." He noted that the Fed might not be too concerned about pushing through another rate cut, especially in view of strong retail sales figures released earlier this morning. Nevertheless, Brusca is also expecting a 50 basis point rate cut in March.
Some economists, however, said that Greenspan's cautiously optimistic remarks about the future of the economy can be attributed to his wish not to dent consumer confidence and turn talk of a recession into a self-fulfilling prophecy.
"He was pretty upbeat about such things as the long-term productivity outlook and emphasised the temporary nature of problems... but he may be more nervous than he's letting on," said Bill Dudley, director of U.S. economic research with Goldman Sachs. In his testimony, Greenspan mentioned that consumer confidence could break to such a degree that slow growth remained an issue. Economists also pointed to Greenspan's comments that individuals react to uncertainty by curtailing spending plans sharply and that thus the adjustment process in the economy "may take some time to run its course." Overall, Greenspan suggested that the current slowdown may be short and sharp as new technologies allow companies to adjust productivity to changes in demand more swiftly than ever before. Kevin Logan, senior market economist at Dresdner Kleinwort Wasserstein North America, argued that this accelerated reaction time on behalf of companies means that the Fed "doesn't have to cut rates aggressively and perhaps a 25 basis point rate cut will suffice." However, he, too, sticks with his forecast for a 50 basis point rate cut in March, explaining that "the economy is still vulnerable to an extended slowdown in growth. Business profits have suffered from higher input costs, both energy and labour costs." "Growth in investment spending is slowing. If it slows rapidly because of a decline in business confidence or because of a lack of financing, the risks of a recession could rise. That's a chance that we don't think the FOMC will want to take -- especially since Greenspan sees the outlook for inflation as relatively benign," Logan concluded.