Greenspan Testimony Rocks Markets

The economy has passed the “point of maximum risk” of a recession, Federal Reserve Chairman Alan Greenspan declared Wednesday. But his suddenly upbeat assessment sent financial markets reeling.

“We are getting whipsawed,” said Sung Won Sohn, chief economist at Norwest Corp. in Minneapolis. “We were looking for encouragement that there will be additional declines in interest rates and instead Chairman Greenspan talks about how wonderful the world is.”

While Greenspan did not totally rule out a recession in delivering the Fed’s midyear outlook to Congress, he cited a number of recently encouraging signs that the economy had regained its footing.

The comments were in contrast to Greenspan’s own warnings June 20 that the risks of a recession had increased. Those statements were followed on July 6 by the first interest rate cut by the Federal Reserve in nearly three years.

The tiny quarter-point reduction in the federal funds rate was matched by a similar cut in commercial banks’ prime lending rate. Financial markets rallied with the Dow surging over the 4,700-level as investors believed further rate cuts were in store.

Greenspan’s comments Wednesday came as he delivered the Fed’s twice-a-year economic outlook to Congress.

The new Fed forecast predicted the economy would slow to growth of around 1.5 percent to 2 percent this year but rebound next year to around 2.5 percent growth.

“Alan Greenspan is saying that we have virtually reached the promised land of a soft landing with 2.5 percent growth and well-behaved inflation,” said David Jones, economist at Aubrey G. Lanston & Co. “In contrast to his speech a month ago, Greenspan’s emphasis on an upbeat story is striking.”

Analysts said that apparently the central bank has been persuaded that a string of more favorable economic reports has greatly lessened the threat of a recession.

Referring to his earlier recession warning, Greenspan said Wednesday, “More recent evidence suggests that we may have passed the point of maximum risk. But we have certainly not yet reached the point at which no risk of undue economic weakness remains.”

Some analysts viewed that comment as a careful hedge on Greenspan’s part, indicating that while there will be no immediate rate cuts by the Fed, some further easing could occur.