Washington, March 17 (Bloomberg) -- Federal Reserve Chairman Alan Greenspan told Congress that the U.S. economy may grow faster once the standoff with Iraq is resolved. Most economists believe him and predict the central bank won't cut its benchmark interest rate at tomorrow's policy meeting. The U.S. economy, while growing, has sputtered. Consumer confidence is the lowest since 1992 and February produced the bleakest jobs and retail reports since November 2001, just after the Sept. 11 attacks. What's been less clear is why, and that's one reason some economists expect the Fed's only move may be to change its outlook to say the economy is at risk of weakening.
``What we don't know is whether the cause is weather and geopolitical risk, some fundamental change in baseline growth, or a combination of all of the above,'' said Kathleen Stephansen, director of global economic research at Credit Suisse First Boston, one of 22 bond firms that deal directly with the Fed. ``Making a monetary policy change amidst this uncertainty won't buy the Fed a great deal of additional growth.'' Sixty-one of 70 economists polled by Bloomberg News predict the Fed's policy making Open Market Committee will leave the overnight lending rate unchanged at 1.25 percent, the lowest since 1961, after its meeting tomorrow. Greenspan last month told the Senate Banking Committee that the ``most important stimulus is the removal of uncertainties'' about Iraq. Some of those questions may be answered soon. The U.S., U.K. and Spain withdrew a resolution that set today as a deadline for Iraq to prove it is disarming, signaling an end to efforts to get United Nations backing for military action against Saddam Hussein's regime. U.S. President George W. Bush is scheduled to address the nation tonight.
Data Change
Fed officials have generally expressed confidence in the underlying economy. San Francisco Fed President Robert Parry, a voting member of the Fed's policy committee, said March 4 that the outlook is ``by no means tipping in the direction of a `double- dip' recession.'' Since that time, the Fed has learned that in February retail sales fell 1.6 percent, the biggest drop since November 2001, and the economy lost 308,000 jobs in the same month. The University of Michigan's preliminary March consumer sentiment index fell to 75, the lowest since 1992. ``We're now at levels that are making me nervous,'' said Cary Leahey, senior economist at Deutsche Bank Securities in New York. Confidence is ``right at the cusp of levels that would suggest a consumer recession.'' Consumer spending accounts for more than two-thirds of the economy, and February's drop in jobs and retail sales has economists marking down estimates of first-quarter growth.
Lowering Forecasts
The economy will probably expand 2.6 percent this year, based on the latest Blue Chip Economics Indicators survey. That's down from the 2.7 percent growth forecast a month ago and less than the 3.3 percent average annual rate for the past 50 years. Along with Iraq, a bleak job market, and a 19 percent surge in regular-unleaded gasoline prices this year are undermining confidence. The 40 percent average gain in unleaded gasoline prices over the past 12 months is limiting the amount of cash consumers have for other goods and services. ``Consumers have ample reason to be gloomy right now,'' said Stephen Stanley, an economist at RBS Greenwich Capital Markets in Greenwich, Connecticut. A shift in the Fed's outlook to cite risks of weakening would increase odds for a rate cut at or before the May meeting, a possibility that some traders bet is a near certainty. Futures contracts on federal funds for May settlement yield 1.06 percent, 19 basis points below the target. Odds of Rate Cut ``The chance of a double-dip recession has increased,'' said Ian Morris, chief economist of HSBC Securities Inc., one of nine economists predicting the Fed will reduce interest rates tomorrow. ``We still have leveraged balanced sheets, we still have excess capacity, and corporate America still needs to cut costs. None of those things are related to Iraq.'' Lehman Brothers economists predict the Fed will reduce the federal funds rate by half a percentage point to 0.75 percent in April, between the regularly scheduled March and May meetings. That would be the lowest since July 1958. The Fed hasn't had an intermeeting rate cut since the week after the terror attacks on New York and Washington. The Dow Jones Industrial Average rose 282 points, or 3.6 percent, at 4:07 p.m. in New York on optimism the U.S. may not take long to win a war with Iraq. The benchmark Treasury due in February 2013 fell 1 1/8 points, pushing its yield up 14 basis points to 3.84 percent.
Other Central Banks
Growth is slowing around the world, and other central banks have been cutting rates. Earlier this month the European Central Bank lowered its benchmark rate by a quarter point to 2.5 percent, the lowest in almost 3 1/2 years. In February the Bank of England cut its benchmark to 3.75 percent, the lowest since 1955, Winston Churchill's last year as prime minister. The European Commission today cut its economic growth forecast and called on central bankers to reduce interest rates in case a war against Iraq deals a further blow to consumer and business confidence. The dozen euro countries are heading for growth of about 1 percent, less than the 1.8 percent expected previously, the commission said. For the first time since World War II, the U.S. central bank faces two risks -- inflation as well as deflation. Prices of goods fell 0.7 percent last year, while service prices rose 3.1 percent, about in line with the gain in incomes. If the recent slump in demand causes accelerated price decreases, the Fed would most likely cut interest rates aggressively, economists said. ``This is not a common situation for the Fed to find itself in,'' said Janet Yellen, a former Fed governor who teaches economics at University of California, Berkeley. ``They should be unusually aggressive if they get anywhere close'' to deflation.
Buying Treasuries
Greenspan and Fed Governor Ben Bernanke have said they would opt for unconventional strategies, such as flooding the banking system with cash through purchases of long-term Treasury notes, if the federal funds rate fell toward zero and became a less effective tool to ward off a collapse in prices. The most recent comments and speeches by Greenspan and other Fed officials suggest the economy is far from that point. And most economists are willing to give them the benefit of the doubt. ``The Fed runs the world's best forecasting shop by a mile,'' said David Romer, a University of California-Berkeley economist who has researched the Fed's forecasting ability. When Greenspan ``says `despite the current weakness, the economy looks good,' I think that is a good starting point.'' //www.quote.bloomberg.com