May 1, 2003 4 min read

By Jeannine Aversa Associated Press Writer

WASHINGTON (AP) – Federal Reserve Chairman Alan Greenspan says the limping economy should gradually grow stronger with the end of the Iraq war, but he’s leaving the door open for lower interest rates if that doesn’t happen.

Greenspan offered the House Financial Services Committee on Wednesday his first detailed thoughts on the economic recovery since February, when the economy was feeling the strain of prewar jitters.

“I continue to believe the economy is positioned to expand at a noticeably better pace than it has during the past year, though the timing and the extent of that improvement remains uncertain,” Greenspan told the lawmakers.

The economy grew at a tepid rate of 1.6 percent in the first three months of 2003. Nevertheless, economists were heartened that it didn’t contract under the weight of war uncertainties, higher energy prices and sinking consumer confidence.

Greenspan noted that many private economists are hopeful a material rebound in economic activity will develop in the second half of this year. “Certainly a number of elements should be working in that direction,” he added.

A recent rebound in stock prices and a retreat in oil prices are welcome developments for businesses and consumers, who are the main force keeping the economy going, Greenspan said.

While the postwar climate boosted consumers’ confidence in the economy in April, businesses are still wary of making big commitments in capital spending or in hiring, major forces restraining economic growth.

“Going forward, some further unwinding of the economic tensions that have been associated with the situation in Iraq seems likely,” Greenspan said. “As that occurs, the fundamental trends shaping the economic outlook should emerge more clearly.”

Given Greenspan’s cautiously optimistic tone, economists believe Fed policy-makers will continue to hold the federal funds rate, the Fed’s main lever for influencing the economy, at a 41-year low of 1.25 percent when they meet next Tuesday. The Fed last cut this short-term rate on Nov. 6.

“I think the Fed will stay on the sidelines next week,” said Lynn Reaser, chief economist at Banc of America Capital Management.

However, in the event the economy doesn’t heal fully on its own in the months ahead and requires a tonic, the Fed is prepared to lower interest rates, Greenspan said.

“We still have room in monetary policy if we choose to move,” the Fed chief said.

Greenspan also repeated his opposition – first revealed in February – to massive tax cuts that would enlarge the federal budget deficit, which is estimated to balloon to record amounts this year and next. He said any further tax cuts need to be offset either with cuts in government spending or tax increases in other areas to keep the deficit from soaring.

The House wants $550 billion in tax cuts over 10 years, while the Senate wants to limit such a package to $350 billion. President Bush recently indicated he’d accept the $550 billion figure, retreating from his original $726 billion plan.

Greenspan also repeated his belief that tax cuts would do little to energize the economy in the short term, given the time it takes to get a tax bill through Congress.

At the Fed’s last meeting on March 18, Greenspan and his colleagues said they couldn’t assess the risks on the economy going forward because the climate was so muddled by the Iraq situation.

Getting a clear picture of the economy probably will take a little time, Greenspan told lawmakers Wednesday.

“Unfortunately, the future path of the economy is likely to come into sharper focus only gradually,” he said. “In the interim, we need to remain mindful of the possibility that lingering business caution could be an impediment to improved economic performance.”

Businesses, coping with uneven customer demand and lackluster profits, have kept work forces lean. Economists believe the unemployment rate will rise to 5.9 percent or 6 percent in April, from 5.8 percent in March. The government releases the employment report Friday.

On other issues, the respiratory disease, called SARS , is having a “major negative impact” on the tourism and travel-related industries in some Asian countries, but is not hurting the broader economy of the region or the U.S. economy in any significant way, Greenspan said.

Greenspan also said Fed policy-makers were on guard to lower interest rates to prevent deflation – a prolonged bout of falling prices – should that become necessary.

“With price inflation already at a low level, substantial further disinflation would be an unwelcome development, especially to the extent it put pressure on profit margins and impeded the revival of business spending,” he said.

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