Posted on: Wednesday, July 25, 2001
Greenspan: Rate cut may be needed
By Jeannine Aversa
Associated Press
WASHINGTON — Federal Reserve Chairman Alan Greenspan said yesterday the economy is still flagging and another interest rate cut may be needed, even as he deflected criticism that monetary policy has lost some of its punch.
"Should conditions warrant, we may need to ease further," he said, referring to another possible cut in interest rates.
Greenspan's twice-yearly economic report to the Senate Banking Committee tracked the written report he presented to the House Financial Services Committee last week.
On Wall Street, bad news about some companies' earnings and revenue sent stocks tumbling. The Dow Jones industrial average fell 183 points to 10,241.
Banking Committee Chairman Paul Sarbanes, D-Md., citing private analysts' comments and recent published articles, questioned whether the Federal Reserve's primary tool to prod or brake the economy has lost some of its impact. The Fed's main lever is to make changes to the federal funds rate, the interest banks charge each other on overnight loans.
In an effort to avert the first recession in the U.S. in 11 years, the Federal Reserve has cut this short-term interest rate six times this year, totaling 2.75 percentage points. It has been the most aggressive credit-easing campaign in nearly two decades.
Greenspan rejected the notion that the Fed's power over monetary policy has diminished.
"The complexity of our economy is such and the way liquidity flows through the system is such that you essentially get very complex differences in the way monetary policy plays out," Greenspan told the committee. "But at the end of the day it does seem to be effective."
Fed watchers have suggested that the Fed used to have more levers to pull, but that some of them have disappeared and others no longer work as designed. Some say the Fed may have lost its influence over longer-term rates like those for home mortgages, a power that had always been implied not legislated. Others are concerned that the stock market hasn't been more responsive to the Fed's rate cuts.
"Clearly where monetary policy goes from here will depend crucially on the evolving situation in the economy," Greenspan said.
Greenspan and his colleagues next meet to discuss interest rate policy on Aug. 21, and many economists believe they will cut rates for a seventh time, probably by a more conservative quarter-point.
Much of the economy's weakness, Greenspan said, stems from businesses sharply cutting production and spending on computers, factories and other capital goods in response to sagging demand.
Still, he again expressed hope that the Fed's actions, falling energy costs and tax-rebate checks will bolster an economy stuck in low gear for a year. The first wave of nearly 8 million tax rebates were mailed out Friday.
Even against the backdrop of forecasts for a smaller government budget surplus this fiscal year, Greenspan reaffirmed his support for tax cuts, something he first endorsed in January.
"I did think a tax cut was a desirable thing to do. I still do," Greenspan said.
Sen. Charles Schumer, D-N.Y., asked Greenspan about current proposals to invest a portion of the Social Security trust fund in the stock market and whether problems could be prevented by requiring investments to be made in certain ways.
"Essentially my concern is that as much as we endeavor to insulate these particular types of funds, we never fully succeed," Greenspan responded, referring to problems with some state and local investment funds for employees. "There are people ... who I think would have found ways very readily around some of these constrictions."
President Bush's proposal would let younger workers invest a portion of their payroll taxes in the stock market, rather than have the government directly invest on their behalf.
Addressing financial upheaval in Argentina and other countries, Greenspan said the risk of worldwide contagion is much less now than was the case with the global financial crises that started in 1997. "One presumes that it can be contained without much of a problem."
On another topic, Greenspan said it could be downright harmful for this country to bar oil companies and other companies doing business with Sudan from selling stock in the United States unless they fully disclosed their dealings with the African nation. The House passed such a bill last month.
"The clear outcome of such a law would effectively be to move financing from New York to London," Greenspan told the senators. "I'm most concerned that if we move in directions that undermine our financial capacity, we are undermining the potential for long-term growth in the American economy."
