Denny Gulino //

WASHINGTON (MktNews) - Federal Reserve Chairman Alan Greenspan used explicit language Wednesday to says the Fed is ready to ease some more "should conditions warrant" and followed that with several warnings that conditions are most likely to be weak the rest of this year.
Next year's four quarters should add up to between 3% and 3.25% growth, he said of the Federal Open Market Committee's central tendency forecasts, with unemployment that goes from as much as 5% this year to as much as 5.25% next year. The top of the FOMC's range is 5.5% next year.
"Certainly, should conditions warrant, we may need to ease further, but we must not lose sight of the prerequisite of longer-run price stability for realizing the economy's full growth potential over time," he said on page 2 of his 12-page prepared testimony.
The risks, he said, "would seem mostly tilted toward weakness in the economy," and the FOMC's reversion to a quarter point rate cut reflected the expected future effect of the 2.75 points of easing this year. "We recognized that the effects of policy actions are felt with a lag," he said.
He warned that there appears to be a "downside risk" to consumer spending the next few quarters as a result of the weaker stock market and softer job market.
Demand for capital equipment "could post a continuing problem," he said, with earnings weakness "virtually across the board" and higher unit labor costs not encouraging businesses to spend.
While the inventory liquidation has to end "at some point" and was quite pronounced in the winter, it has moderated in the spring, he said. There has been "little gain" in working down communication industry inventories.
Eventually high-tech industries will reestablish themselves as beneficiaries of innovation and higher productivity, since those industries are still developing, not maturing, but meanwhile economic data lately is simply "more mixed."
Long-term rates have hardly budged, he noted, in part because of lower forecasts of future budget surpluses.
A "good part" of the weaker demand is likely to persist "for a while," he said although the decline in energy prices will help companies and households.