WASHINGTON, Feb 13
Federal Reserve Chairman Alan Greenspan said on Tuesday the U.S. economy faces a sharp slowdown in the coming year, with businesses working off unsold inventories and consumers less confident about the future.
In testimony to the Senate Banking Committee, he left the door open for more interest rate cuts amid an outlook where "downside risks predominate."
Projecting a major economic slowdown in 2001, he said the transition from super-charged growth rates to a weaker economy might not be a seamless one.
"In addition to the possibility of a break in confidence, we don't know how far the adjustment of the stocks of consumer durables and business capital equipment has come," the Fed chief said. But he said the economy could be headed for a pickup once inventories were brought into line with sales.
He added that consumer confidence is still at a level which was historically compatible with economic growth. Greenspan also said the recent decline in energy prices and the further declines anticipated by futures markets should stimulate purchasing power and would be an "important factor" supporting a recovery in demand growth in the quarters ahead.
"Although consumer confidence has fallen, at least for now it remains at a level that in the past was consistent with economic growth," Greenspan said.
Greenspan said the accelerated process of business reaction to economic downshifting had forced the Fed to act more aggressively to cut interest than it has in past slowdowns.
"Economic policymaking could not, and should not, remain unaltered in the face of major changes in the speed of economic processes," Greenspan said.
The Fed, in a rare action between scheduled meetings of its policymaking group, slashed interest rates a half percentage point on Jan. 3 and followed it up with a matching cut at the conclusion of a regular two-day meeting on Jan. 31.
The Fed's next scheduled meeting is March 20 and it is widely expected to trim rates again.
He also noted that inflation has remained low and that the Fed's two rapid-fire half-percentage point interest rate cuts in January had not put the low-inflation outlook at risk.
Some signs of recovery were apparent in retail sales data released earlier on Tuesday. U.S. January retail sales rose 0.7 percent, beating average forecasts of a 0.6 percent climb from economists surveyed by Reuters.
Stripping out autos, retail sales climbed 0.8 percent versus expectations of a 0.4 percent rise.
Some of the drama is likely to come after Greenspan's official testimony when he will probably face questions from angry Democrats stung by Greenspan's endorsement of President George W. Bush's plan to tap bulging budget surpluses for tax cuts. Greenspan told lawmakers on Jan. 25 that he preferred tax cuts to having the government use the money to buy private-sector assets.
Federal Reserve Chairman Alan Greenspan said on Tuesday the U.S. economy faces a sharp slowdown in the coming year, with businesses working off unsold inventories and consumers less confident about the future.
In testimony to the Senate Banking Committee, he left the door open for more interest rate cuts amid an outlook where "downside risks predominate."
Projecting a major economic slowdown in 2001, he said the transition from super-charged growth rates to a weaker economy might not be a seamless one.
"In addition to the possibility of a break in confidence, we don't know how far the adjustment of the stocks of consumer durables and business capital equipment has come," the Fed chief said. But he said the economy could be headed for a pickup once inventories were brought into line with sales.
He added that consumer confidence is still at a level which was historically compatible with economic growth. Greenspan also said the recent decline in energy prices and the further declines anticipated by futures markets should stimulate purchasing power and would be an "important factor" supporting a recovery in demand growth in the quarters ahead.
"Although consumer confidence has fallen, at least for now it remains at a level that in the past was consistent with economic growth," Greenspan said.
Greenspan said the accelerated process of business reaction to economic downshifting had forced the Fed to act more aggressively to cut interest than it has in past slowdowns.
"Economic policymaking could not, and should not, remain unaltered in the face of major changes in the speed of economic processes," Greenspan said.
The Fed, in a rare action between scheduled meetings of its policymaking group, slashed interest rates a half percentage point on Jan. 3 and followed it up with a matching cut at the conclusion of a regular two-day meeting on Jan. 31.
The Fed's next scheduled meeting is March 20 and it is widely expected to trim rates again.
He also noted that inflation has remained low and that the Fed's two rapid-fire half-percentage point interest rate cuts in January had not put the low-inflation outlook at risk.
Some signs of recovery were apparent in retail sales data released earlier on Tuesday. U.S. January retail sales rose 0.7 percent, beating average forecasts of a 0.6 percent climb from economists surveyed by Reuters.
Stripping out autos, retail sales climbed 0.8 percent versus expectations of a 0.4 percent rise.
Some of the drama is likely to come after Greenspan's official testimony when he will probably face questions from angry Democrats stung by Greenspan's endorsement of President George W. Bush's plan to tap bulging budget surpluses for tax cuts. Greenspan told lawmakers on Jan. 25 that he preferred tax cuts to having the government use the money to buy private-sector assets.
