Greenspan seeks to calm fears on US recovery

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The Independent Online
ALAN Greenspan, the chairman of the Federal Reserve Board, moved yesterday to calm fears that President Bill Clinton's budget deficit reduction plan would derail the emerging US recovery.

Mr Greenspan's comments implied that an imminent reduction in US rates was unlikely. They also coincided with news of a collapse in German money supply growth last month, which, despite a technical explanation, revived speculation that the Bundesbank may be ready to ease monetary policy again by early April.

In semi-annual testimony to Congress on monetary policy, the Fed chairman also hinted that the US central bank was unlikely to ease monetary policy further, until it was clear Congress was ready to approve the broad outline of Mr Clinton's proposals for reduced federal spending.

With no imminent movement in German or US rates in prospect, their currencies ended little changed on the day. By contrast, revived optimism over German rates and fading expectations of lower UK rates bolstered demand for sterling. In London, the pound gained 1.17 cents to dollars 1.4542 and was 1.53 pfennigs higher against the mark, at DM2.3760. The dollar finished little changed at DM1.6340.

The Bundesbank yesterday announced that German broad money, M3, shrank by an annualised 2.3 per cent in January, after climbing by 8.7 per cent in December. Though this was below the German central bank's annual target range of 4.5-6.5 per cent it pointed out that M3 expanded at an annualised rate of 6.5 per cent in the latest six months.

The collapse in money growth partly reflects the fact that M3 growth in January is calculated from a new base, of the average level during the fourth quarter. But it also reflected a recent outflow of funds into the dollar.

Analysts nevertheless pointed to very weak bank lending and predicted the Bundesbank would prepare the ground for another cut in rates by April if inflation figures, out in about 10 days' time, reveal ebbing price pressures.

In Washington, meanwhile, Mr Greenspan told the Senate banking committee: 'Fears that the deficit reduction can be overdone and create a degree of fiscal drag that would significantly harm the economy, I find misplaced.'

Announced earlier this week, the proposals call for dollars 247bn of spending cuts and dollars 246bn of higher taxes which, after additional rises in spending and some new tax breaks, would cut the deficit by some dollars 325bn by 1997.

President Clinton's announcement provoked fears on Wall Street that the emerging US recovery could be undermined.

Referring to the unsuccessful efforts of Paul Volcker, the former Fed chairman, to persuade Congress to cut spending, Mr Greenspan said: 'In our current political environment, to presume that the Congress and the President would jointly cut too much from the deficit too soon is, in the words of my predecessor, 'nothing I would lose sleep over'.'

He said it was important that Congress focused on cutting spending as well as raising taxes.

UK stocks of unsold goods held by manufacturers, wholesalers and retailers fell by pounds 44m, at 1985 prices, in the fourth quarter. This was the smallest quarterly destocking for nearly three years.

(Photograph omitted)