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The Honolulu Advertiser
Posted on: Thursday, November 14, 2002

Greenspan prepared to cut rates further

By Martin Crutsinger
Associated Press

WASHINGTON — Federal Reserve Chairman Alan Greenspan said yesterday the economy has hit a "soft patch" as corporate accounting scandals and a possible war with Iraq have shaken consumer and business confidence.

Federal Reserve Chairman Alan Greenspan said he expects the economy to rebound next year. But if it doesn't, he told lawmakers yesterday, he won't hesitate to drop interest rates further.

Associated Press

Greenspan made clear in testimony to Congress that the Fed would not hesitate to cut interest rates further if necessary to bolster the wobbly economy. But he also indicated that the central bank believes the most likely economic outcome is a return to stronger growth next year.

If the economy does rebound, Greenspan said, the Fed is ready to quickly reverse course and begin raising interest rates to make sure that the extraordinarily low interest rates of the past year do not drive prices higher.

The central bank last week reduced its target for overnight bank loans by a half-point to 1.25 percent, the lowest level since July 1961.

It was the Fed's first rate move since last December. Commercial banks responded by pushing their prime lending rate down by a half-point to 4.25 percent, the lowest point since May 1959 for this benchmark for millions of business and consumer loans.

Greenspan said yesterday that the central bank needed to respond aggressively to a variety of factors that have depressed growth, including the fallout from corporate accounting scandals and the big drop in stock prices prompted by worries about a possible war with Iraq.

"Over the last few months, these forces have taken their toll on activity and evidence has accumulated that the economy has hit a soft patch," Greenspan said.

Private economists interpreted Greenspan's comments as an indication that the Fed believes it has done enough to ensure the current slowdown will not worsen into a double-dip recession. They believe the central bank will leave rates unchanged when policy-makers next meet on Dec. 10.

However, analysts said that if economic data does not strengthen, the Fed is ready to cut rates again, probably at their first meeting of the new year in January.