Greenspan: Recovery under way

  • Wednesday, February 27, 2002 9:00pm
  • Business

The Washington Post

WASHINGTON — Federal Reserve Chairman Alan Greenspan said Wednesday he believes an economic recovery "is just getting under way" but cautioned that it’s likely to be more moderate than the rebounds that have followed most other U.S. recessions.

"Despite the disruptions engendered by the terrorist attacks of Sept. 11, the typical dynamics of the business cycle have reemerged and are prompting a firming in economic activity," Greenspan told the House Financial Services Committee.

Federal Reserve officials now expect the economy to grow 2.5 percent to 3 percent during the course of this year, a pace that "is somewhat below the rates of growth typically seen early in previous expansions," he said.

Several factors will be at work holding back the economy, the Fed chairman said. Consumer spending, particularly for new cars and trucks, has remained relatively healthy during the recession that began last spring rather than declining as it has in most slumps. That means there is no "pent-up demand" to put spending into overdrive as in the past, he said.

At the same time, Greenspan said, a number of industries still have large amounts of excess production capacity, which means investment in new plants and equipment probably will be slow to rise. In addition, weak economies in several foreign nations will limit export sales, while uncertain conditions in U.S. financial markets may continue. All these factors together "seem likely to restrain the near-term performance of the economy," he concluded.

Fed officials also expect the 5.6 percent jobless rate to rise to a level of 6 to 6.25 percent late this year, he said. That would be in line with past experience because initially "firms rely primarily on overtime and shifts from part-time to full-time work" rather than adding workers as their sales pick up, he said.

Meanwhile, the officials predict 2002 will be another very good year on the inflation front with the price index for personal consumption expenditures — a somewhat broader inflation measure than the more well known consumer price index — to rise about 1.5 percent this year. With energy prices falling sharply last year, the measure rose about 1.25 percent.

Greenspan did not address the issue of when and under what circumstances central bank policymakers could decide to begin to raise their 1.75 percent target for overnight interest rates, a target they cut 11 times last year. Many financial analysts expect the Fed to begin to raise the target sometime after the middle of the year once a solid recovery is clearly in place.

Many Fed officials believe the current target couldn’t be maintained once the economy is healthy again without eventually causing inflation to get worse. But if the unemployment rate is close to 6 percent and the inflation rate is running around 1.5 percent, as their forecasts predict, there may be no rush to raise the target. For example, economists at Salomon Smith Barney in New York expect the target to be no higher than 2.25 percent at the end of the year.

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