Washington, May 21 (Bloomberg) -- Federal Reserve Chairman Alan Greenspan may say economic reports since the end of the Iraq war are mixed and reassert his optimism about stronger growth in the year's second half to Congress today, economists said. ``Greenspan hasn't received enough information about the postwar activity to ditch his basic forecast that the economy will get better in the second half,'' said Nancy Roman, president of G7 Group Inc., an economic advisory firm whose clients manage more than $100 billion. ``He will play down fears of imminent deflation, while leaving the door open for additional rate cuts if the economy weakens.'' Greenspan and other Fed policy makers on May 6 kept the benchmark interest rate at 1.25 percent, the lowest since 1961, saying growth may accelerate later this year now that fighting has ended in Iraq. The Federal Open Market Committee that Greenspan leads also cautioned that growth might be threatened by ``unwelcome'' further declines in inflation.
Investors are betting the Fed is concerned enough about the second scenario to cut the interest rates, lest slowing inflation turn into an actual decline in prices and deepen an economic slump. Benchmark 10-year Treasuries had their biggest gain in eight weeks yesterday, with their yield falling as much as 13 basis points to 3.35 percent, the lowest since 1958. The yield had risen to 3.42 percent as of 8:27 a.m. in New York. Traders who make markets in futures contracts on the overnight lending rate fully expect the central bank to reduce rates by 0.25 percentage points on June 25. Futures contracts for July delivery have an implied yield of 0.99 percent. Greenspan is scheduled to speak before the Joint Economic Committee of Congress starting at 9:30 a.m. The Fed should cut rates further to help boost the economy, Representative Jim Saxton, a New Jersey Republican and co-chairman of the committee, said in interview with Bloomberg Television.
Benefits and Risks
``There are two or three things that can be done in Washington to have the most immediate impact of the economy,'' Saxton said. ``One is tax cuts, and the other, most important in my opinion, is to further ease the monetary supply. Greenspan told the House Financial Services Committee on April 30 that he expected the economy to expand at a ``noticeably better pace'' following the end of the conflict in Iraq earlier that month. The economy grew 1.6 percent at an annual rate in the first quarter, and the rate may increase to 3.8 percent in the year's final three months, based on the median economist forecast in a Bloomberg News economist survey. Since the chairman last spoke to Congress, ``activity data have continued to be mixed and disinflation has accelerated,'' wrote Peter Hooper and Joseph Lavorgna, U.S. economists at Deutsche Bank Securities.
`Mixed' Reports
Consumer confidence has risen and oil prices have declined since the fighting subsided, and the Standard & Poor's 500 Stock Index is up 8.4 percent since March 31. Congress is preparing to pass a tax-cut package valued at $350 million to $550 billion, and monetary policy has kept borrowing costs low for businesses and consumers. Still, there are risks. Factory use is declining and that American companies aren't doing much hiring. Without much demand, companies have to cut prices. ``Overall demand right now is tepid,'' said Carl Tannenbaum, chief economist at ABN Amro North America Inc. in Chicago. Use of the nation's industrial capacity fell to 74.4 percent in April, the lowest since June 1983, the Federal Reserve said last week. April's retail sales that same month unexpectedly fell 0.1 percent and states received 417,000 new claims for jobless benefits in the week ended May 10. The number of people receiving jobless benefits rose in the week ending May 3 to 3.77 million, the highest since Nov. 17, 2001.
Disinflation
The rate of inflation has slipped further since the Fed last met: consumer prices excluding food and energy rose at a 1.5 percent rate in the 12 months ending April, the lowest since 1966, the Labor Department said Friday. ``We expect Greenspan to place the inflation outlook firmly in the context of the wide and growing gap between actual output and the productive capacity of the U.S. economy,'' said Lou Crandall, chief economist at Wrightson ICAP LLC, wrote in a note to clients earlier this week. The excess capacity has contributed to a drag on the U.S. economy, Fed Governor Susan Bies said in a speech last night in Vienna, Virginia. Restoring executives' confidence to invest and expand their businesses is a key to helping the economy, which should be growing about 3 percent a year, she said. As for deflation, or a general decline in prices that would be hard to reverse, Bies said that, in contrast to Japan, the health of the U.S. banking system would work as a ``powerful tool to deal with the issue.''
Price Declines
Fed officials are concerned that the ample slack in resources, from labor to plants, is leading to a negative cycle of additional price declines. Regional Federal Reserve bank presidents such as Robert McTeer of Dallas and William Poole of St. Louis have said the economy has the ability to grow at rates of 4 percent or higher without producing inflation. The economy isn't growing at those rates today and businesses are finding it difficult to generate sales while maintaining profits. Ford Motor Co., the world's second-largest automaker, told analysts yesterday that it will hasten cost cuts this year because it can't raise prices enough on most U.S. models to offset the impact of rebates and low-interest loans that are driving sales. Apparel, sporting goods, furniture, and several other sectors of the economy are also experiencing price declines. While service prices, such as the cost of medical care, are rising, the effect on many corporations is higher costs for employee benefits combined with lower profits for the products they make. ``We have deflation in a wide swath in the American economy,'' said Tannenbaum, the ABN Amro economist. ``It is causing the kinds of distortions the Fed and others would be worried about.'' //www.bloomberg.com