WASHINGTON – Federal Reserve Chairman Alan Greenspan Tuesday said the U.S. economy had held up against corporate accounting scandals that have hammered the stock market but that these and other wounds may take time to heal, suggesting rates would stay on hold until that happens.
"While the economy has held up remarkably well, not surprisingly the depressing effects of recent events linger," Greenspan said in prepared testimony, citing not just the stock market slide, but also the Sept. 11 attacks and last year's recession.
In his twice-yearly monetary policy testimony to Congress, the Fed chief said mild inflation had given the Fed leeway to keep U.S. interest rates at the current 40-year low of 1.75 percent and added that the central bank had decided to maintain that easy stance until the economy is out of the woods.
"We have chosen to maintain that (accommodative) stance pending evidence that the forces inhibiting economic growth are dissipating enough to allow the strong fundamentals to show through more fully," Greenspan said.
He said he and his Fed colleagues now expect the economy this year to grow between 3.50 percent and 3.75 percent when measured from the fourth quarter of 2001. That's stronger than the the 2.5 percent to 3 percent pace forecast in February.
"The effects of the recent difficulties will linger for a bit longer but as they wear off, and absent significant further adverse shocks, the U.S. economy is poised to resume a pattern of sustainable growth," Greenspan said.
But he also sounded a warning.
"Financial markets have been notably skittish of late and business managers remain decidedly cautious," Greenspan said.
To restore investor trust shaken by the accounting scandals, Greenspan said CEOs must be held accountable to accurately report on the financial condition of their companies and should be penalized for not doing so.
Greenspan said checks and balances on corporate governance that worked well in the past might have been hurt by the go-go mentality of the 1990s that "arguably engendered an outsized increase in opportunities for avarice."
Greenspan's testimony comes as a startling wave of accounting scandals threatens to cause consumers and businesses to spend and invest less. It was deep cuts in capital spending that helped to push the economy into recession last year.
"Considerable uncertainties -- about the progress of the adjustment of capital spending and the rebound in profitability, about the potential for additional revelations of corporate malfeasance and about possible risks from global political events and terrorism still confront us," Greenspan said.
Against that backdrop and given that inflation has remained low, Fed policy-makers have opted to hold short-term interest rates at 40-year lows at each of their four meetings this year.
"We have chosen to maintain that stance pending evidence that the forces inhibiting economic growth are dissipating enough to allow the strong fundamentals to show through more fully," Greenspan said.
A growing number of economists believe the Fed will keep rates unchanged through the rest of the year. Low interest might motivate consumers to keep spending and businesses to invest, forces that would bolster economic growth.
Consumers, whose spending accounts for two-thirds of all economic activity, have been holding up despite the spotty recovery and the sour stock market, Greenspan said.
"Consumers do not appear to have retrenched in the retail markets," he said. "Indeed consumers responded strongly to the new interest rate incentives of motor vehicle manufacturers this month. Early reports indicate a significant improvement in sales over June."
Weak stocks have yet to crimp consumer spending because of offsetting boosts from low interest rates, solid appreciation in home values and extra cash from refinancing.
In contrast, business spending has remained weak, he said. Companies whose profits took a hit during the slump are reluctant to make big commitments in hiring and in investment until they are sure the recovery is here to stay.
Greenspan repeated his support for forcing companies to treat lucrative stock options for top executives as a business expense.
Fed policy-makers' forecast is for the nation's unemployment rate -- now at 5.9 percent -- to peak at between 5.75 and 6 percent later this year, an improvement from the Fed's earlier forecast and significantly below the 7.8 percent jobless rate hit in the last recession of 1990-91.
Inflation was forecast to be moderate this year, with consumer prices as measured by a price gauge tied to the gross domestic product to increase by about 1.5 percent to 1.75 percent, little changed from an earlier estimate.
Reuters and the Associated Press contributed to this report.