By Edward Kean
Washington, July 16 (BridgeNews) - When he testifies on Capitol Hill Wednesday, Federal Reserve Chairman Alan Greenspan probably will indicate there is a good chance that the currently sluggish U.S. economy will strengthen in coming months, analysts said Monday. But the Fed chairman will leave the door ajar for additional interest rate cuts in case the economy's current lethargy continues, they said.
Greenspan is set to present his mid-year update of the Fed's outlook for the U.S. economy and monetary policy when he testifies before the House Financial Services Committee at 1000 ET Wednesday. His eagerly-awaited testimony is likely to shape expectations for interest rate movements in coming months and influence the behavior of U.S. bond and stock markets in the weeks ahead.
"His message is likely to be cautiously upbeat," said Morgan Stanley Dean Witter chief U.S. economist Richard Berner. "He's going to say the recovery is close at hand, if not immediately at hand."
"He will build a case the economy is bottoming out, the worst is behind us and we're headed for modest economic growth over the next 18 months," added Mark Vitner, economist for First Union Capital Markets.
Early signs of such behavior include the improvement in the stock market, the widening gap between short-term interest rates and long-term interest rates and slower declines in factory orders, he said.

GROUNDWORK FOR STRONGER ECONOMY
Analysts say that Greenspan is likely to argue that the Fed's substantial reductions in interest rates so far this year, combined with looming income tax rebates and lower energy prices, should lay the groundwork for a stronger economy in coming months.
The Fed has cut its key interest rate target by 2.75 percentage points so far this year, the fastest pace of monetary stimulus in nearly 20 years.
But private economists say Greenspan won't slam the door on the possibility of additional interest rate cuts.
Although Greenspan will state the Fed has lowered rates enough to promote a second-half acceleration, he also will say "the risks remain on the downside and the Fed is prepared to lower rates more, if necessary," said Charles Lieberman, chief economist for Advisors Financial Center. "He will make it clear that the (Federal Open Market Committee) stands ready to cut its federal funds rate target further should job losses cause a downward break in confidence and a sharp pullback in spending," Goldman Sachs economists wrote in their weekly economic commentary Friday. While Greenspan will not "shut the door" on further rate cuts, he will indicate the Fed has "done an awful lot" to try to stimulate the economy, said Joshua Feinman, chief economist of Deutsche Asset Management. Nomura Securities chief economist David Resler said Greenspan may leave investors unsatisfied about the outlook for monetary policy.
"He's going to be less forthcoming than people want him to be," Resler said.
Nonetheless, Resler said the economy is weak enough that the Fed likely will have to lower rates by another 75 basis points before its current rate cuts are completed. Most economists think the Fed will cut rates by only another quarter point this year.

SLOW GROWTH RISK STILL OUTWEIGHS INFLATION
Greenspan will continue to argue that economic weakness is the greater threat than inflation, forecasters said. It would be "grossly premature" for the Fed to signal to investors that inflation is now as great a threat as a weak economy, said Anthony Chan, of Banc One Investment Advisors. Indeed, most analysts expect Greenspan to continue to argue that inflation will remain in check.
"I don't think inflation is on the Fed's radar screen," said Lehman Brothers senior economist Joe Abate.
"The extreme tightness in labor markets is dissipating," Feinman said. "The outlook is pretty good inflation should stay contained. The implication is that's not likely to pose an impediment to additional monetary ease if needed."
But Feinman also said Greenspan may express caution about the need to avoid excessive monetary easing to guard against an inflation outbreak in the future.
When Greenspan presents his testimony, the Fed also will issue updated forecasts on economic growth, inflation and unemployment for this year, as well as tentative economic forecasts for next year.
Economists say the Fed probably will trim its estimate of economic growth this year in light of weaker-than-expected activity in the first half of 2001.
In February, the Fed predicted the economy would expand 2.0-2.5% this year.
But the economy grew at only a 1.2% annual rate in the first quarter and probably grew less than that in the second quarter. Thus, analysts say the Fed will revise that estimate down to about 1.5-2%. Resler said he expects the Fed's forecasts will imply a 2.5% growth rate in the second half of this year.
For next year, analysts say the Fed likely will project economic growth of about 2.5-3%, still below the central bank's estimate of how fast the economy can expand without inflation.
The Fed also is likely to boost its estimate of the fourth-quarter unemployment rate to 5% from its earlier forecast of 4.5%, economists said.
Currently, the jobless rate stands at 4.5%, but many economists think it will move up to about 5% in coming months, as joblessness tends to increase after an economy has weakened.

GREENSPAN SEEN PLAYING DOWN EMERGING MARKETS IMPACT
In addition to discussing the U.S. economic outlook, the Fed chairman probably will note the U.S. economic slowdown has spread to other parts of the world, analysts said. Greenspan will call attention to the fact that the slowdown "has gone global in scope," Resler said. That hurts U.S. exports.
However, economists think Greenspan will try to avoid signaling the Fed will lower interest rates as a result of the recent financial turmoil in such developing countries as Argentina and Turkey.
"If pressed on specifics on Argentina and Turkey, he'll probably try to be as noncommittal as possible," Resler said. "He'll not want the markets to think there's any linkage there at all."