WASHINGTON - Striking a more upbeat note than he did two weeks ago, Federal Reserve Chairperson Alan Greenspan said Thursday that the economy was showing signs of improvement and declared himself "conflicted" on the need for any economic stimulus legislation from Congress.
After Greenspan testified, independent analysts predicted that the Federal Reserve, which cut interest rates 11 times last year, would refrain from further cuts when it meets Tuesday and Wednesday. Indeed, the next Fed move on interest rates may be to raise them later this year.
"The first tightening move is unlikely to occur before late summer at the soonest," said Merrill Lynch chief economist Bruce Steinberg.
While expressing confidence in the economy's ability to bounce back, Greenspan warned that several risks were still ahead, including rising unemployment.
"Job losses could put something of a damper on consumer spending," he said.
In his overall appraisal of the economy, he said: "Some of the forces that have been restraining the economy over the past year have started to diminish" and business conditions are starting to improve.
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Two weeks ago in a speech in San Francisco, Greenspan stressed the risks rather than the recovery, and his caution caused stock prices to fall sharply. On Thursday, Greenspan conceded that his "phraseology" may have confused analysts, and his now-clearer views cheered Wall Street. By the close of business, the Dow Jones Industrial was up 65 points, or 0.7 percent, to 9796.
Greenspan, whose role as something of an economic seer carries significant weight in Congress, as in the financial world, testified before the Senate Banking Committee. Even as he spoke, the Senate embarked on yet another attempt to pass a bill to spur economic recovery through a combination of business tax breaks and aid to the unemployed. The Fed chair was equivocal in his view of the measure.
"Whether we do it or we don't, there are pluses and minuses" to stimulus legislation, Greenspan said. "I do not think it is a critically important issue; I think the economy will recover in any event."
Greenspan did, however, endorse extending unemployment benefits for laid-off workers, a central element of the Democrats' stimulus plan.
Senate Minority Leader Trent Lott, R-Miss., cited Greenspan's testimony in noting Thursday that "there are beginning to be doubts" about a stimulus package. "We still will have the option to make a final decision down the road," he said.
In surprisingly strong language, Greenspan also singled out bankrupt Enron Corp.'s accounting practices as "egregious" and predicted that Congress would step in with legislation to further regulate "corporate governance."
"We are not an economy that takes erosion of reputation as a minor question," he said. Enron's scandalous example will drive corporate leaders to cultivate public trust, he said, something he sees as essential to an orderly market economy.
His testimony came one day after the Congressional Budget Office reported that the projected 10-year federal budget surplus had dropped from the $5.6 trillion estimated last year to $1.6 trillion now. CBO analysts attributed the $4 trillion drop to the economic downturn, extra spending prompted by the terrorist attacks last September and last year's Republican-backed $1.35 trillion tax cut.
In light of that CBO analysis, Greenspan's support for large tax cuts last year came back to haunt him Thursday. Sen. Paul Sarbanes, D-Md., sharply questioned Greenspan's tax-cut advocacy, noting it had helped to produce deficits like those the Fed chair had warned against in the past.
Greenspan said his stand on the question last year was sound, based on information available at the time, because he feared that projected budget surpluses would end up forcing the government to buy stock or accumulate other private assets, a move he strongly opposed as improper.
He pointed out that the CBO projects that moderate annual budget surpluses will resume by the middle of the decade. That prospect could help Congress deal with the coming retirement of the baby boom generation and the demands that will place on the Social Security system, he said.
But he warned Congress that it will have to exercise fiscal discipline to achieve that goal. "This will clearly be no simple task," Greenspan said.
Knight Ridder Tribune
