In a departure from his usual opaque style, US Federal Reserve chairman Alan Greenspan yesterday gave a strong, clear signal that the slowdown in the US economy had not yet run its course and that further interest rate cuts might be necessary to avoid recession.
"The uncertainties surrounding the current economic situation are considerable," Mr Greenspan told Congress in a half-yearly report on monetary policy. "And until we see more concrete evidence that the adjustments of inventories and capital spending are well along, the risks would seem to remain mostly tilted towards weakness in the economy."
Mr Greenspan's sober comments came against a background of dozens of disappointing corporate earnings reports this week. "Pressures on profit margins have been unrelenting," said the Fed chairman, whose comments sent stock prices downwards on the prospect that soft performance would continue for at least another quarter.
The latest big American companies to report plunging revenues included Apple Computers, Veritas Software, American Express and EMC. American Express said it would cut between 4,000 and 5,000 jobs, adding to an unemployment rate which Mr Greenspan said would rise to 5 per cent by the end of the year - and possibly higher in 2002.
"What we see is an economy that is still weak and still deteriorating," the Fed Chairman warned gloomily in a question and answer session with members of the House Committee on Financial Services. He added, however, that "the rate of deterioration is slowing", and forecast that "towards the end of the year we will see things improving, and next year as well".
Recalling that the Federal Reserve had already cut shortterm interest rates this year by a cumulative 2.75 per cent to a level of 3.75 per cent, Mr Greenspan said that "should conditions warrant we may need to ease further", though it must not lose sight of its goal to maintain longer-run price stability. "The period of sub-par economic performance, however, is not yet over, and we are not yet free of the risk that economic weakness will be greater than currently anticipated, and require further policy response."
This comment, along with what he called the "quiescence of inflationary pressures", sparked a rally in bond markets which interpreted it as a pointer to a further interest-rate reduction as early as the next meeting of the policy-making Federal Open Market Committee on August 2nd.
The Fed was still waiting for the full impact of its six rates cuts this year, Mr Greenspan said, noting that the GDP growth for all four quarters of 2001 would be in the range of 1.25 to 2 per cent, rising next year to 3.0 to 3.25 per cent.
Tax rebates of several hundred dollars will be paid to American households this summer under the Bush administration's tax reforms, and Mr Greenspan linked this with falling energy costs and a reduction in manufacturing inventories as the best hope for a modest recovery.
The problem of bloated inventories inhibiting production has been a consistent theme for Mr Greenspan, and yesterday he warned that the problem was far from under control.
The dollar slipped against other currencies on Mr Greenspan's emphasis of the continued risks to the economy. The Fed chairman refused to be drawn on the controversy over the strong dollar, which US manufacturers complain is hurting exports and which US trading partners say is impeding a global recovery.
This was not his business he said, but a matter for Treasury Secretary Paul O'Neill, and in any event the dollar's strength against foreign currencies was dictated by the weakness of other world economies.
