Greenspan hints at further rate cuts

The Federal Reserve chairman, Alan Greenspan, today held out the prospect of lower interest rates if US economic growth does not pick up soon.

But any additional reductions would be limited because the central bank has already cut the nation's benchmark lending rate to its lowest in seven years, which probably will lead to faster growth by year end, he suggested.

Faced with a slowing economy, the US central bank has aggressively cut rates this year, bringing key rates down to 3.75%, their lowest level since April, 1994. But with the US economy finely balanced, Mr Greenspan hinted at more easing in monetary policy.

"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,'' Mr Greenspan said in his semiannual testimony before Congress.

Analysts saw a readiness to cut rates further in Mr Greenspan's comments.

"He seems to be more forthright in seeing a willingness to cut interest rates in the future than expected. It is uncharacteristically blunt," said Alan Ruskin, research director at 4cast, a New York forecasting firm. "Most people were expecting signs at least of tentative signs of a bottoming and I don't see that so far in his comments."

American businesses, caught by surprise by a rapid drop in demand late last year and earlier this year, have been cutting production to reduce stocks of unsold goods, Mr Greenspan told the House financial services committee.

While car makers have largely completed the process, computer and semiconductor producers inventories are only "belatedly being brought under control,'' he added, in a reference to the bloodletting among hi-tech companies such as Nortel and Cisco.

Mr Greenspan painted a grim picture for company profits. Pressure on profit margins has been "unrelenting," he said, as companies have been forced to deal with unexpectedly high energy costs at a time when low unemployment was pushing up labour costs. Both problems should ease in time, although it was not clear how soon that will happen, he stated.

It was also unclear whether consumer spending will hold up. Declining or flat share prices have lowered household wealth, and "we can expect the decline in stock market wealth that has occurred over the past year to restrain the growth of household spending,'' he cautioned.