WASHINGTON – Federal Reserve Chairman Alan Greenspan maintained a cautious stance Wednesday, saying the U.S. economy was emerging from recession but cautioning that the recovery was likely to be a moderate one.
"Despite the disruptions engendered by the terrorist attacks of Sept. 11, the typical dynamics of the business cycle have reemerged and are prompting a firming in economic activity," the Fed chief said in his eagerly awaited semi-annual testimony on the state of the economy to the House Committee on Financial Services.
"An array of influences unique to this business cycle, however, seems likely to moderate the speed of the anticipated recovery," Greenspan cautioned.
Lean Inventories
Greenspan said a key sign that the economy was "close to a turning point" could be found in the behavior of inventories that now were so lean that companies will be forced to step up production in coming months.
Greenspan's cautiously optimistic tone was in line with Wall Street expectations and the view of most analysts that while the Fed is probably finished cutting interest rates, it will not feel any need to raise rates, at least before the latter part of the year.
That will mean the federal funds rate, which the Fed pushed down to a 40-year low of 1.75 percent in a series of 11 aggressive rate cuts last year, will stay unchanged for a significant period of this year. Thus, short-term borrowing costs for millions of Americans will also be unchanged.
The prime rate, the benchmark for many business and consumer loans, which is now at a 36-year low of 4.75 percent, is expected to remain at that level at least until midyear.
Greenspan said he is looking for a subdued recovery because consumer spending, the normal driver for growth in the early months of a rebound, held up remarkably well last year, giving it less room to expand this year.
Real-Time Information Softened Recession
But even with this problem, Greenspan said, the recession, which began last March and was worsened by the Sept. 11 terrorist attacks, was shaping up to be one of the mildest in U.S. history.
He attributed this favorable outcome in part to advances in computer technology that give companies real-time information on how their businesses are doing, allowing them to adjust quickly for changing economic conditions.
"Crucially, the imbalances that triggered the downturn and that could have prolonged this difficult period did not fester," Greenspan said.
The recession that ended a record-long 10-year period of prosperity may already be over, in the view of many private economists. They believe the drop in output for this downturn will be only about 0.3 percent, making it the mildest recession in post-World War II history.
Greenspan did not cite specific numbers, but he agreed that this recession is shaping up to be "a significantly milder downturn than the long history of business cycles would have led us to suspect."
In its semiannual set of economic forecasts, the Fed projected that Gross Domestic Product, the broadest measure of total economic activity, will grow by about 2-1/2 to 3 percent this year. That would mark a sharp improvement from lackluster 1.1 percent expansion in GDP during 2001, the most sluggish performance since a contraction of 0.5 percent in 1991.
'Enronitis' Not a Threat
The Fed chairman did address "Enronitis" -- the market's freshly minted term for accounting fears sparked by the collapse of energy trader Enron Corp. -- but emphasized that he did not see this as a major threat to the recovery.
Greenspan said Enron's unraveling was an example of a risk stemming from firms that have "conceptual" rather than physical assets. Such firms are "inherently fragile" and faith in them can evaporate overnight.
Although he and other Fed officials have said in the past they do not see Enron specifically as a threat to the economic recovery, Greenspan said at some point in future such firms focusing on conceptual products may raise unique issues for the economy if problems at one weakens confidence in others.
"The difficulty of valuing firms that deal primarily with concepts and the growing size and importance of these firms may make our economy more susceptible to this type of contagion," he said.
Reuters and the Associated Press contributed to this report.
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