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The Honolulu Advertiser
Posted on: Thursday, January 10, 2002

Greenspan likely to upgrade U.S. economic forecast

By Brendan Murray and Simon Kennedy
Bloomberg News Service

WASHINGTON — Federal Reserve Chairman Alan Greenspan is likely to state tomorrow that the U.S. economy is on the verge of recovery and may suggest that the central bank's series of interest rate cuts is close to an end, analysts said.

That's the message six other Fed officials have delivered so far this week in advance of their next policy meeting Jan. 29-30. Citing signs that manufacturing is improving, housing remains strong and consumer confidence is rising, policy-makers have said they see an end by midyear to the recession that began in March.

If the economy continues to show evidence of a rebound, this month's Fed meeting may be the first in more than a year in which policy-makers will not have lowered the benchmark overnight bank lending rate. The Fed reduced rates 11 times last year and the overnight rate is now at a 40-year low of 1.75 percent.

"He will not close the door on a rate cut, but I think the chances of it are less than 50 percent," said former Fed Governor Lyle Gramley, now a consulting economist to the Mortgage Bankers Association of America. Greenspan will offer his views on the economy in a speech in San Francisco tomorrow, his first detailed look since October.

Most Fed comments this week echoed those of Philadelphia Fed Bank President Anthony Santomero. "We are, in fact, building a foundation for a recovery," Santomero said yesterday.

The economy contracted at a 1.3 percent annual rate in the third quarter. It probably shrank at a 1.4 percent pace in the final quarter and is likely to contract at a 0.1 percent rate this quarter, according to the median forecast of 42 economists surveyed last month.

The economy lost 1.1 million jobs last year and unemployment climbed in December to a 6 1/2-year high of 5.8 percent. Manufacturing has slumped.

"On balance, I'm reasonably confident that nearly all of the adjustments we've been witnessing will be substantially completed by midyear and that the conditions for healthy growth will have been re-established," said Jack Guynn, president of the Fed Bank of Atlanta.

Recent statistics show increased consumer confidence, a rise in home sales, and a pickup in orders to manufacturing and service companies. While unemployment climbed last month, the economy lost fewer jobs in December than any time in four months.

Several Fed officials have cautioned, however, that rising unemployment may curtail the willingness of consumers to spend, in a trend that may hinder the rebound.

Investors have pushed up longer-term interest rates in expectation that the Fed's series of rate reductions is over and that the economy is on the mend. The yield on the benchmark 10- year Treasury note is up almost a half percentage point since Dec. 1.