The US Federal Reserve sees no reason for an immediate, emergency cut in interest rates, its chairman, Mr Alan Greenspan, indicated in testimony yesterday to the US Congress, in which he made clear the US economy had not yet slipped into recession.
While consumer confidence has indeed weakened and "will require close scrutiny in the period ahead", he said, the data suggest "that consumers have retained enough confidence to make longer-term commitments".
Anticipating a more apocalyptic assessment of the US economy following a series of bleak indicators, Wall Street had factored in an immediate half-percentage point rate cut, and the Dow Jones and Nasdaq indices plummeted in late morning when it became clear this was unlikely.
By the end of the session the Dow Jones Industrial Average closed at 10,495.28 down 141.60, a 1.33% decrease while the Nasdaq Composite Index was lost 56 points to finish at 2,151.82, a slide of 2.54%.
Mr Greenspan said the "exceptional degree of slowing" seen in December "seemed less evident in January and February". Statistics published by the Commerce Department just before he spoke showed that the US economy grew at an annual rate of only 1.1 per cent in the final three months of last year, its weakest performance in five years. However, Mr Greenspan's sober assessment of continuing risks sent a clear signal that the Federal Reserve, which has already reduced the key interbank lending rate by one point in January, will do more to prevent the economy sliding into recession. Mr Greenspan is still expected to announce a further rate cut at the next meeting of the Federal Open Market Committee (FOMC), the central bank committee which sets US monetary policy, on March 20th.
"Although the sources of long-term strength of our economy remain in place, excesses built up in 1999 and early 2000 have engendered a retrenchment that has yet to run its full course," Mr Greenspan said.
"This retrenchment has been prompt, in part because new technologies have enabled businesses to respond more rapidly to emerging excesses. "Accordingly, to foster financial conditions conducive to the economy's realising its longterm strengths, the Federal Reserve has quickened the pace of adjustment of its policy. Still, as the FOMC noted in its last announcement, for the period ahead, downside risks predominate. "In addition to the possibility of a break in confidence, we don't know how far the adjustment of the stocks of consumer durables and business capital equipment has come.
"Also, foreign economies appear to be slowing, which could damp demands for exports; and continued nervousness is evident in the behaviour of participants in financial markets, keeping risk spreads relatively elevated." The weak showing of the US economy in the fourth quarter shows how dramatically the US economy has slowed since the second quarter of last year when it grew at 5.6 per cent. The fall was attributed to declining exports and a drop in spending on durable goods. Even with the slowdown, the growth rate for the year was 5 per cent, the highest since a 7.3 rise in 1984. On Tuesday, concerns over lost jobs and slowing business brought consumer confidence to its lowest level in four years. Orders to US factories for major items dropped in January to their lowest level in 19 months and new home sales fell 10.9 per cent. Mr Greenspan blamed much of the economy's weakness on an effort by businesses to cut back quickly on production and inventories in the face of falling sales. In the fourth quarter, business investment on new plants and equipment slipped to 0.6 per cent compared to 7.7 per cent in the July-September period. Reacting to Mr Greenspan's sober assessment, President Bush said it was "all the more reason to accelerate the tax cut as soon as possible". Mr Bush is asking Congress to make individual tax reductions backdated to January 1st to enable people to pay off debts and start spending again.
