Greenspan hedges on timing of recovery

Associated Press

WASHINGTON — The economy, hit last year by recession and the worst terrorist attacks in U.S. history, appears to be stabilizing, but it is too early to declare recovery is at hand, Federal Reserve Chairman Alan Greenspan said Friday.

Greenspan, making his first extended comments about the economy since October, gave a mixed review of current conditions, noting some hopeful signs but also warning of "significant risks."

Financial markets, which had been looking for a more upbeat assessment from Greenspan about chances for a recovery, lost ground after the speech. The Dow Jones industrial average lost 80.33 points for the day to finish at 9,987.53.

In light of Greenspan’s continued concerns, private economists said it is now more likely that the Fed, which cut interest rates 11 times last year, will cut interest rates again when the central bank meets on Jan. 29-30.

"It is pretty much a fait accompli that we are going to get another cut in rates," said Sun Won Sohn, chief economist at Wells Fargo in Minneapolis.

In his address, delivered to a business audience in San Francisco, Greenspan noted a number of hopeful signs, including a sharp reduction by businesses in their inventories of unsold goods.

But he said there were also powerful forces that could derail any recovery, especially given that the economic weakness that began in the United States has now spread to the rest of the world.

"Despite a number of encouraging signs of stabilization, it is still premature to conclude that the forces restraining economic activity here and abroad have abated enough to allow a steady recovery to take hold," Greenspan said.

"I would emphasize that we continue to face significant risks in the near term," he said, citing such threats as weak corporate profits, the steep plunge in business investment and possible cutbacks in consumer spending due to rising unemployment.

"This is cautious optimism," said David Wyss, chief economist at Standard &Poor’s Co. in New York. "He believes the signs have turned from unrelentingly negative to more mixed. But he feels there are still a lot of risks out there."

The Fed’s string of rate cuts last year drove the federal funds rate, the interest that banks charge each other, down to a 40-year low of 1.75 percent.

However, the last rate cut on Dec. 11 was by only a quarter-point, not the bolder half-point moves the Fed had employed following the Sept. 11 attacks.

Analysts said that Greenspan’s worries about lingering threats to a recovery probably mean that the central bank will not rush to start raising rates later this year out of worries that the rebound will trigger inflation pressures.

"Greenspan wants to see real hard evidence that a recovery has begun before he switches out of his cautious interest-rate-cutting mode," said Ken Mayland, chief economist at ClearView Economics in Cleveland.

Greenspan said that the unemployment rate, which hit a six-year high of 5.8 percent in December, is likely to continue rising even after the recovery begins. Private economists are forecasting unemployment will hit a high of 7 percent by next summer. By comparison, the jobless rate in the last recession in 1990-91 topped out at 7.8 percent.

"If the tentative indications that the contraction phase of this business cycle is drawing to a close are ultimately confirmed, we will have experienced a relatively mild downturn," Greenspan said.