Federal Reserve Chairman Alan Greenspan said Wednesday that the economic slowdown is “quite pronounced,” but chances of a recession are small because businesses have already adjusted to weaker demand for goods.
“We are indeed in a rather sluggish environment,” Greenspan said at an international banking conference.
The probabilities of a recession have edged up, “as indeed one would expect to be the case,” Greenspan told bankers from the United States and 22 other nations. But he said inflationary pressures have been stifled by a reduction in business inventories.
“Because of what’s been going on, the probability of a significant inventory recession in the intermediate future into next year and perhaps beyond, has decreased very significantly,” Greenspan said at the International Monetary Conference.
Recent evidence of a soft economy has sparked concerns that the country could be heading into a recession. Financial market participants have been looking for signs that the Fed will lower interest to take some of the pressure off consumers and businesses. At the Fed’s last rate policy meeting two weeks ago, it left rates unchanged.
The central bank has raised interest rates seven times, aiming to slow economic growth to a point where inflation is not a threat.
Greenspan said inflationary pressures were stifled largely by “a reduction of inventory investment, which is still modest but is going to proceed, as best I can judge, for awhile.”
Building inventories without growing demand eventually would force manufacturers to halt or slash production as unsold goods piled up, an “inventory recession” in which the economy actually shrinks, he said. Economists sometimes call it a “business cycle recession,” marked by rising unemployment and business failures.
Regarding proposals to allow banks greater powers to deal in securities, Greenspan said he did not see the Fed emerging as a “super regulator” if Congress broadens banks’ powers and allows the merger of commercial and investment banking houses.