By Steven K. Beckner Market News International - Cautious optimism laden with uncertainty characterized the testimony of Federal Reserve Chairman Alan Greenspan Tuesday, as he presented the Fed's semi-annual monetary policy report to Congress.
Greenspan appeared to be trying to strike a careful balance between vigilance and caution -- between concern about near-term economic weakness and longer term optimism about the economy's prospects. Thus Greenspan clearly left the door open to further interest rate reductions, while casting doubt on whether further rate cuts will be as aggressive as in January, when the Fed made two 50 basis point cuts in the federal funds rate.
Greenspan, in his prepared testimony before the Senate Banking Committee, said downside risks still "predominate," but he pointed to signs of improvement in the economy and sounded relatively confident about the economic outlook as the year progresses.
The Fed Chairman said "the exceptional weakness so evident in a number of economic indicators toward the end of last year (perhaps in part the consequence of adverse weather) apparently did not continue in January."
He said economic growth slowed "to the stalling point" as firms cut back production to reduce unsold inventories, but he echoed other Fed policymakers in expressing hope that the inventory adjustment will take place much faster than usual. And he projected real growth for the year in the 2%-2.5% range.
At the same time, Greenspan said weak consumer confidence, continued inventory adjustments, weakness in foreign economies and "continued lender nervousness" still pose downside risks to the economy.
Greenspan's testimony was marked by a mixture of short-term anxiety and longer term optimism, much as his Jan. 25 testimony and the comments of other Fed policymakers.
Reiterating the Fed's statement announcing a second 50 basis point rate cut at the Jan. 31 Federal Open Market Committee, Greenspan said "downside risks predominate."
On the downside, there was this key passage in Greenspan's testimony: "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. Also, foreign economies appear to be slowing, which could damp demands for exports; and, although some sectors of the financial markets have improved in recent weeks, continued lender nervousness still is in evidence in other sectors.
"Because the advanced supply-chain management and flexible manufacturing technologies may have quickened the pace of adjustment in production and incomes and correspondingly increased the stress on confidence, the Federal Reserve has seen the need to respond more aggressively than had been our wont in earlier decades," Greenspan added.
Greenspan hinted that the Fed will not be shy about lowering rates further, if necessary, because low inflation has given it the latitude to ease monetary policy safely. Referring to last month's 100 basis points of easing, he said, "An essential precondition for this type of response was that underlying cost and price pressures remained subdued, so that our front-loaded actions were unlikely to jeopardize the stable, low inflation environment necessary to foster investment and advances in productivity."
But Greenspan also leavened his testimony with a number of more hopeful comments. Indeed, his testimony could be weighted more in that direction, at least over the longer term. In particular, as he has in the past, Greenspan voiced optimism about future productivity growth.
"The prospects for sustaining strong advances in productivity in the years ahead remain favorable," Greenspan said. "As one would expect, productivity growth has slowed along with the economy. But what is notable is that, during the second half of 2000, output per hour advanced at a pace sufficiently impressive to provide strong support for the view that the rate of growth of structural productivity remains well above its pace of a decade ago."
"Moreover," Greenspan went on, "although recent short-term business profits have softened considerably, most corporate managers appear not to have altered to any appreciable extent their long-standing optimism about the future returns from using new technology."