Greenspan: Economy turning a corner, but slowly

Barely had Federal Reserve Chairman Alan Greenspan opened his mouth in testimony to Congress yesterday than he told Wall Street what it anxiously wanted to know:

Yes, underlying inflation remains at a "modest rate."

Yes, the Fed will cut interest rates further if the currently slack economy requires.

Yes, the Fed expects the economy to start recovering later this year. It projects growth of 1.25 to 2 percent this year, and about 3 percent next year.

And yes, there is "ample evidence" that the nation is experiencing only "a pause" in the innovations that have boosted productivity since 1995 - a key factor paving the way for rising standards of living.

While the overall message was positive, it was also largely expected. The initial reaction of stock market investors was not enthusiastic. Apparently hoping for a cheerier hint of a quick rebound, they drove share prices down in the morning.

For many economists, the remarks confirmed a consensus that America is on a path toward growth - but at a sub-par rate.

"The risks would seem to remain mostly tilted toward weakness," the veteran central banker said in one of his twice-yearly reports on the economy.

Mr. Greenspan also offered an informative explanation of why the Fed has eased monetary policy and and of the limitations of the Fed in its efforts to manage the economy and stabilize prices.

Other economic news yesterday was mixed. Consumer prices rose by 0.2 percent in June. If food and energy are excluded, the "core" rate of inflation was 0.3 percent. Both increases were slightly more than had been expected. A rise in housing prices was a big factor.

Another report by the Labor Department found that weekly earnings were about unchanged from May to June. And for the past 12 months, wages rose by just 0.3 percent after inflation. (Price increases ate up most of a 3.6 percent gain in weekly earnings.) Meanwhile, even as home construction sped ahead in June, new building permits declined.

Greenspan, in his testimony to the Committee on Financial Services, expressed hope that the central bank's easier monetary policy, combined with falling energy costs and the tax-rebate checks now being mailed, will give the economy a boost in coming months. He also sees business inventory levels falling to "more comfortable levels," but he did not say when this will happen. But when it does, it will "spur production and incomes."

Greenspan sounded less hopeful for high-tech industries. "Eventually," he said, the slump there will abate.

Greenspan spoke of the inability of most businesses to raise prices in the economic downturn, underscoring the "quiescence of inflationary pressures." But he cautioned that forecasts by economists "do not have an enviable record."

"Faced with such uncertainties, a central bank's vigilance against inflation is more than a monetary policy cliche," he said. It was part of an explanation of why the Fed last cut interest rates by only 0.25 percentage points rather than half a point.

Fed policymakers have already slashed interest rates six times this year, totaling 2.75 percentage points. The federal funds rate - which banks charge each other on overnight loans - now is 3.75 percent.

Dealing with criticism that the Fed had allowed a "bubble" in the economy and in stock prices, Greenspan said "There is no tool to change human nature. Too often people are prone to recurring bouts of optimism and pessimism [leading to] speculative excesses."

The Fed, he indicated, has only a limited ability to anticipate and act on asset price bubbles. Similarly, he said, policies can curb inflation but not entirely eliminate the ups and downs of the so-called business cycle.

(c) Copyright 2001. The Christian Science Monitor