WASHINGTON – Federal Reserve Chairman Alan Greenspan, in a sober assessment of economic prospects, says the worst of the slowdown that has plagued the country for nearly a year may not be over.
But he signaled that the central bank, which has already cut interest rates five times since January, stands ready to do more in an effort to prevent a recession.
"The period of sub-par economic growth is not yet over, and we are not free of the risk that economic weakness will be greater than currently anticipated, requiring further policy responses," Greenspan said in a dinner speech Thursday night in New York City.
Private analysts viewed the remarks as a clear signal that further rate relief from the Fed was on the way. The central bank has already cut rates by 2.5 percentage points since early January, its most aggressive credit easing since 1982 when the country was struggling to emerge from the worst recession of the post-World War II period.
Many private economists predicted that the Fed would cut rates by another half-point when policy-makers next meet on June 26-27.
"Mr. Greenspan is telling us that his job is not done yet," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis. "Right now, it's a high wire act. We are straddling between a soft landing and a recession."
Economists are worried that rising layoffs that have occurred as businesses cut back on production to get their inventories under control will rattle public confidence and cause consumers to cut back on spending.
The government on Friday revised sharply lower its estimate of economic growth for the first three months of the year, showing the economy was growing at a barely discernible 1.3 percent pace from January through March instead of the previously reported 2 percent growth rate. Many economists believe growth in the current quarter is still hovering around the 1 percent level, a pace that could easily be turned negative by an unexpected shock.
"Greenspan is right. We are not out of the woods yet," said David Wyss, chief economist at Standard & Poor's in New York. "I am optimistic that we can avoid a recession, but we haven't done it yet."
Greenspan, while finding plenty of things to worry about in his speech at the Economic Club of New York, did suggest that the Fed's aggressive credit easing should soon start to take effect.
"Our front-loaded policy actions this year should be providing substantial support for a strengthening of economic activity later this year," Greenspan said.
Economic activity slowed sharply last summer, a decline that was worsened when the stock values of many high-technology companies came crashing back to earth, forcing companies to cut back on their investment spending plans and making a big dent in individuals' portfolios.
Greenspan mentioned these factors in his speech, saying that consumer confidence remains "fragile" and describing the pressure on company profit margins as "unrelenting."
He said that higher energy prices were also likely to "weigh on the economy" in the short-run, putting a further squeeze on corporate profits.
Greenspan's remarks, his first detailed review of the economy since February, stood in contrast to comments by other Fed officials this week, who dealt less with economic threats and emphasized the likelihood that growth will soon return to the 3.5 percent to 4 percent level the Fed believes is optimal. Gary Stern, president of the Fed's Minneapolis regional bank, said on Tuesday he was looking for a "significant" improvement in the second half of this year.
A Fed board member, Laurence Meyer, speaking in Scotland on Thursday, predicted a "gradual" return to higher growth rates. Meyer voiced worries that the Fed could be running a risk of overdoing the rate cuts and thus be sowing the seeds for inflation problems down the road.
Greenspan, however, told his New York audience that he was not concerned about inflation currently, believing that the sharp slowdown in demand would restrain business pricing power.
"Undoubtedly businesses are feeling the effects of diminished pressures in product markets," Greenspan said. "With energy inflation probably peaking and the easing of tightness in labor markets expected to damp wage increases, prices seem likely to be contained."
The economic slowdown has already pushed the unemployment rate from a three-decade low of 3.9 percent in October of last year to 4.5 percent currently. Many economists are forecasting the jobless rate could top 5 percent before a sustained rebound begins to take hold.
Analysts believe that one of the factors that will propel a recovery in the second half will be the initial impact of billions of dollars in tax cuts Congress is expected to approve for this year.
In response to a question, Greenspan said the central bank would not alter monetary policy until after the tax package is passed by Congress and the Fed was able to see what impact it was having on economic activity.