Greenspan remarks fuel hopes for rate cut

Investors marked up the chance of lower interest rates in the United States later this year after cautious testimony yesterday…

Investors marked up the chance of lower interest rates in the United States later this year after cautious testimony yesterday by Mr Alan Greenspan, chairman of the Federal Reserve, and a survey showing weak confidence among manufacturers.

Mr Greenspan's comments in front of a Congressional committee were similar to those of other Fed policymakers in recent weeks.

They caused little revision to the likelihood of a rate cut when the Fed's open market committee (FOMC) meets next week. Markets put the chance of a cut at about 25 per cent.

But together with a Chicago purchasing managers' index, which fell to a six-month low in April, Mr Greenspan's remarks increased the probability of lower rates in the second half of the year.

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The market is pricing in a higher than 50 per cent chance of a quarter-point cut in rates by the FOMC's meeting in late June. Yesterday it increased the probability that rates would be below their current levels until early next year.

Long-term interest rates also rose, while the dollar fell during London trading.

Some investors focused on Mr Greenspan's warning, at the end of his prepared testimony, that a further fall in inflation would be "an unwelcome development".

This focused investors' minds on the Fed's determination to head off deflation with lower interest rates if necessary.

Mr Bruce Kasman, chief US economist at JP Morgan in New York, said: "I always read a Greenspan speech with an eye to the last paragraph. The door is clearly not closed to a further easing [of interest rates\]."

The Fed chairman's testimony was a balancing act, which emphasised the uncertainties remaining after the end of the Iraq conflict.

Mr Greenspan said: "Six weeks after the beginning of the war, we have only limited readings on broader economic conditions and that information has been mixed."

His expectation that recovery would pick up in the second half of the year was tempered by doubt over whether businesses were ready to take advantage of low interest rates.

Mr Greenspan warned: "We need to remain mindful of the possibility that lingering business caution could be an impediment to improved economic performance."

The Fed chairman stuck to his line on the Bush administration's proposal for tax cuts, in spite of committee members' attempts to provoke him into further comment.

He said a reduction in taxes on dividends was welcome but ought to be balanced by spending cuts elsewhere.

Mr Greenspan warned the spread of the SARS virus had the potential to disrupt supply chains in the US economy, especially through the use of "just-in-time" delivery processes from east Asia, but said there was no evidence of such damage yet.