Fed: Slowdown not over yet

Greenspan: No hints on timing of any new rate cut

The slowdown in the US economy has yet to run its full course, Federal Reserve chairman Alan Greenspan warned on Wednesday.

In prepared comments to the House Financial Services Committee, Mr Greenspan said the economy remained "on a path inconsistent with satisfactory economic performance" despite two interest rate cuts in January.

Analysts viewed his remarks as signalling that further interest rate cuts were on the way, although no details on the timing of any such move were given.

They said an emergency, unscheduled rate cut - expectations of which had driven stock markets higher in recent days - now looked unlikely in the near future.

Stock markets fall

US stock markets fell as investors discounted the possibility of any immediate rate move.

"He threw a big bucket of ice water on the stock market," said Lehman Brothers economist Ethan Harris.

The Dow Jones industrial average dropped 141.60, or 1.3%, to 10,495.28 after falling as much as 213 points in volatile trading.

The Nasdaq composite index fell 55.99 to 2,151.83, a 2.5% drop. The index remained at levels not seen since December 1998.

"The Fed is not ready to pull the trigger right away. But clearly the Fed is not done with easing just yet," Wells Capital Management senior economist Gary Schlossberg added.

So far this year, interest rates have been trimmed 1% in two cuts implemented on 3 and 31 January in an attempt to stimulate growth.

Analysts said the current rates of 5.5% were neutral and a cut of at least 0.5% could be expected following the Fed's next meeting on 20 March.

On the foreign exchange markets, the euro rose against the dollar as investors digested Mr Greenspan's comments.

At 2200 GMT, the euro traded at $0.9220 from $0.9176 a day earlier.

Limited retrenchment?

Mr Greenspan said the economy showed an "exceptional degree" of slowing late last year although this "seemed less evident" in January and February.

He said car and home sales had been only modestly weak, suggesting consumers retained enough confidence to make longer-term commitments.

As long as the factors contributing to long-term productivity growth remained intact, "retrenchment" in the economy would "presumably be limited", he said.

Most analysts viewed the remarks as slightly more upbeat than Mr Greenspan's Senate testimony two weeks ago.

"I think he gave a very balanced view of the economy. It's not really falling off a cliff, it's sliding," Credit Suisse Asset Management managing director Stanley Nabi said.

Quicker response

In a later question-and-answer session with lawmakers, Mr Greenspan said that buoyant stock markets had been a major factor behind economic growth in the last five years but it was too soon to say whether recent sharp falls could cause a recession.

"Whether it in and of itself is enough to actually induce a significant contraction which in retrospect we will call a recession is yet too early to make a judgement on," he said.

He also said new technology had enabled businesses to respond more rapidly to economic changes and Fed policy makers were moving faster as a result.

"Old economic policy must indeed adjust itself for the changing timeframe in which the economy itself is moving," he said.

Downwards GDP revision

Mr Greenspan's comments came as the Commerce Department revised downwards its estimate for US economic growth in the last three months of 2000.

It estimated year-on-year gross domestic product (GDP) growth at 1.1% for the quarter, down from an earlier estimate of 1.4%.

It was the weakest quarterly performance since the second quarter of 1995 but marginally better than many economists had expected.

The downwards revision reflected weaker imports and exports of goods and services and lower inventory investment, the Commerce Department said.