Greenspan warns US economy 'still weak and still deteriorating'

Alan Greenspan, the Chairman of the Federal Reserve, warned the United States' economy remained fragile and that recent interest rate cuts had not yet halted the slowdown. His remarks, made in testimony before the US Congress yesterday, seemed to signal a further cut next month.

"The period of sub-par economic performance, however, is not yet over, and we are not free of the risk that economic weakness will be greater than currently anticipated, and require further policy response," he said.

After delivering a prepared report, Mr Greenspan nonetheless said in response to questions that it was possible the worst may be over by the end of the year. The economic data had shifted from almost entirely negative to being more mixed. "I do think that we are seeing signs that the bottom is beginning to structure itself," he said, still adding that the risks tended, "toward economic weakness".

"What we see ... is an economy which is still weak and, indeed, in certain respects is still deteriorating," Mr Greenspan told members of the House Financial Services Committee. "But the rate of deterioration is clearly slowing and indeed there is considerable evidence to suggest we are approaching stability at a lower level." He added: "If I had to make a forecast ... towards the end of this year we will see things improving and clearly so next year."

The tone of his report – a twice-a-year snapshot of the US economy – was mostly gloomy, however. The Fed has already cut lending rates six times this year, and Mr Greenspan left open the option of further easing, prompting speculation that the Fed would order another rate cut on 21 August.

Goldman Sachs told clients: "This report should revive market participants' hopes for further Fed easing over the balance of 2001, and in particular it should squash fears of a quick rebound in money-market rates during 2002."

In early afternoon trading, the Dow Jones index was down 0.6 per cent at 10,542.8, while the technology-laden Nasdaq was off 1.9 per cent at 2,027.5.

Feeding the continuing economic weakness, Mr Greenspan said, were turbulence in foreign economies, lagging consumer confidence in the US and a lingering freeze on capital spending by businesses, many of which remain focused on cutting inventory.

"Until we see more concrete evidence that the adjustments of inventories and capital spending are well along, the risks would seem to remain mostly titled toward weakness in the economy," he said.

Elements that gave him cheer, Mr Greenspan said, were the continuing absence of any significant inflationary pressure in the US economy, coupled with newly falling energy prices and the prospect that tax cuts should begin to boost consumer spending later this year and early next. He also paused to marvel at the fact that the economy had withstood so many months of negative news with relative poise.

"The economy is still standing and that suggests that there is some fundamental support in the system," he said.