Washington, Feb. 11 (Bloomberg) -- Federal Reserve Chairman Alan Greenspan said the U.S. economy should grow faster once tensions with Iraq are resolved and doesn't need the added boost of a tax cut such as the one proposed by President George W. Bush. The possibility of war ``is hanging very heavily on economic decision making and thus economic growth,'' Greenspan told the Senate Banking Committee. If business spending doesn't pick up after the conflict is resolved, interest rates and taxes ``will doubtless move higher on the policy agenda.'' There's likely no need for now to stimulate the economy more through the Fed's monetary policies or the government's budget plans, the chairman said. Bush is pushing a combination of tax cuts that would cost $1.3 trillion over 10 years. Some Democrats say the proposal would benefit mainly the rich, do little to aid growth and swell the national deficit. ``I am not one of those who is convinced that stimulus is desirable policy at this point,'' Greenspan said. ``I support the president's proposal on eliminating the double-taxation of dividends not as a short-term stimulus measure, but as long-term good corporate tax policy and something which would add to the long-term flexibility and potential growth of the economy.'' With the budget deficit forecast to hit a record $307 billion next year, the chairman urged care not to let the shortfall ``get out of hand.'' ``The deficit must be maintained at minimal levels,'' he said.
The Federal Open Market Committee has cut interest rates a dozen times since January 2001 to spur the economy. U.S. gross domestic product expanded at a 0.7 percent annual rate in the final three months of 2002, the slowest quarter since July through September 2001.
Selling the Package
Senate Democratic Leader Tom Daschle called Greenspan's testimony the ``kiss of death'' for Bush's tax-cut plan, and new Treasury Secretary John Snow vowed to step up his effort to convince Congress to pass the measure. ``We've only begun to sell the package -- we've just begun the program -- so I think it's a little early to be saying this package isn't going to go anywhere,'' Snow said in his first briefing with reporters since he was sworn in last week. Christopher Low, chief economist at FTN Financial in New York, said the biggest surprise was Greenspan's ``implied opposition to Bush tax cuts.'' ``There's nothing specific, but Greenspan calls for more budget discipline and tougher accounting that will make a tax cut even harder,'' Low said. The U.S. economy is likely to accelerate during the course of this year, the Fed said in its twice-yearly economic forecast accompanying Greenspan's testimony. Unemployment may not fall much and inflation will remain in check, the report said.
Growth Forecasts
The Fed expects the economy to grow at a 3.25 percent to 3.5 percent inflation-adjusted rate this year, when measured between the fourth quarter of 2002 and last three months of 2003. That's up from 2.8 percent last year. ``We're not as optimistic as the chairman or the FOMC,'' said Gerald Cohen, a senior economist at Merrill Lynch & Co. in New York. ``It's not clear to us that Iraq is going to be the catalyst to get the economy back to near potential'' once the conflict is resolved. Merrill forecasts 2.75 percent growth this year on the same basis as the Fed prediction. The jobless rate will probably be between 5.75 percent and 6 percent by the fourth quarter, the Fed said. Unemployment fell to 5.7 percent in January after reaching an eight-year high of 6 percent in December. The personal consumption price index, an inflation measure tied to gross domestic product, may rise by 1.25 percent to 1.5 percent this year from 1.9 percent last year.
Holding Rates Steady
On Nov. 6, Fed policy makers lowered the benchmark overnight bank lending rate by a half percentage point to a 41-year low of 1.25 percent, a move Greenspan today called ``insurance against the threat of persistent economic weakness.'' The FOMC had cut rates 11 times in 2001. ``If the economy unfolds as the Fed expects in 2003, we judge it very unlikely that the Fed will cut rates this year,'' said John Ryding, chief economist for Bear Stearns & Co. One chief executive officer said he agreed with the Fed's assessment that the U.S. economy may grow faster once more is known about the Iraq situation. ``Whatever the solution to the crisis will be, putting the crisis behind us certainly would mean strong momentum for the economy,'' Dieter Zetsche, CEO of DaimlerChrysler AG's Chrysler unit, said after announcing a new engine plant in Michigan. ``As long as all of this uncertainty is in front of us it is certainly somewhat slowing down consumer confidence and the overall potential of the economy.''
Market Reaction Treasuries pared declines during Greenspan's testimony as traders bought back contracts they sold before his address. The 4 percent note that matures in November 2012 rose about 1/16, pushing its yield down 1 basis point to 3.96 percent at 2:49 p.m. The Dow Jones Industrial Average fell 77 points, or 1 percent, to close at 7843.11. ``Guys sold before the number, thinking Greenspan would say exactly what he said'' and that it would be negative for Treasuries, said Douglas Warner, a Treasury note futures and options broker with Man Financial Inc. at the Chicago Board of Trade. Hans Blix, the chief United Nations weapons inspector in Iraq, ``is much more important than Greenspan this week'' The chairman's comments, the first of two annual appearances before congressional banking panels, are supposed to reflect views of the central bank's seven governors and 12 district bank presidents. Greenspan said his comments about additional fiscal stimulus and the Bush plan were his own views, not necessarily those of his colleagues.
Fed's View
The Fed members' view, Greenspan said, is that the economy has performed about as they expected, with final sales slowing and ``soft'' business spending as companies kept inventories lean and concern about accounting scandals restrained investors. On top of that came talk of war. ``In particular, worries about the situation in Iraq contributed to an appreciable rise in oil prices,'' the Fed chairman said. Mounting war tensions led to falling stock prices, high market volatility, and wider spreads between government and corporate bond yields, limited hiring and capital spending, and slowed inventory building, he said. The Fed's Nov. 6 rate cut helped markets improve, ``but only haltingly.'' The Standard & Poor's 500 Index has declined about 10 percent the past two months, partly on concern that a U.S.-led war with Iraq would hurt the economy and cut into corporate profits. The dollar has declined against the euro for six straight months. Crude oil prices rose 16 percent in December and 7.4 percent in January.
`Pay As You Go'
He recommended lawmakers move to ``accrual'' accounting from the current ``cash'' accounting system, so the actual costs of existing programs and proposed changes would be clear. He also suggested that Congress eliminate the $6.4 trillion debt ceiling that the Treasury has warned it will breach next week. Because the limit reflects tax and spending programs already endorsed by Congress it is not ``very useful,'' he said. The Fed chairman also called on the senators to ``without delay'' reinstitute statutory limits on discretionary spending and ``pay-as-you-go'' budget rules that require new spending to be offset by additional taxes or spending cuts elsewhere. Triggers on spending and ``sunsets'' on programs would be ``helpful,'' he suggested. Greenspan also said Congress should base cost-of-living increases in federal retirement programs on the new ``chain weighted'' consumer price index instead of the CPI itself, which overstates the cost of living. If that had been used in the most recent fiscal year, the 2002 deficit would have been $40 billion dollars lower than its actual $159 billion. //www.quote.bloomberg.com