The economy could be headed for its first decline in more than four years, Federal Reserve Chairman Alan Greenspan said Tuesday. But he hinted any “modest near-term recession” could be brief and said fighting inflation must remain the Fed’s top priority.
“A complex business cycle process is under way, whose outcome is yet to be determined,” Greenspan said in a speech to The Economic Club of New York. “Uncertainties abound.”
Analysts said they expect Greenspan to urge his colleagues on the Federal Reserve to postpone any cut in interest rates when they hold a key meeting next month. They said they expect him to argue that the Fed needs more economic data and should wait until at least the following meeting on Aug. 22 before acting.
In his speech, Greenspan said the Fed’s job is to consider adjusting interest rates “in the context of our longerterm goal of price stability. A consistently disciplined monetary policy is what our global financial system increasingly requires and rewards.”
Earlier in the day during an appearance before Congress, he suggested that the current economic slowdown may be more severe than anticipated.
Greenspan said gross domestic product, the output of all goods and services produced in the United States, at best appears to have expanded only slightly in the second quarter, which ends next week.
“There is very little GDP growth” for the AprilJune quarter, he told the Senate Banking Committee. “It is a very low rate of increase and it could be marginally negative.”
But in his much-anticipated speech in New York, Greenspan emphasized the possibility that the abrupt slowdown could be nothing more than some jarring bumps on the way to smoother, sustainable growth.
There is “some increased risk of a modest nearterm recession,” Greenspan said. “But the early onset of this process of moderation also indicates markedly reduced prospects for a more severe inventory-induced slowdown later.”
Despite the economy’s sluggishness, analysts said they expect the Federal Reserve to hold rates steady at its meeting July 5-6.
“If the Fed eases and then the economy picks up, then it’s accused of being a fine-tuner and not sticking with its commitment to hold inflation down for the longer run. That loses the Fed a lot of credibility,” said Lyle Gramley, a former Federal Reserve board member and a consultant to the Mortgage Bankers Association of America.
The stock market was moderately lower Tuesday. The Dow Jones industrial average slipped 3.12 points below the peak reached Monday to 4,550.56.
The last time the economy contracted was in the first three months of 1991 as the nation was about to emerge from a recession that began in 1990. A recession usually is defined as at least two straight quarters of declining GDP.
Greenspan has sent some confusing signals recently over the state of the economy and the possibility the Fed will lower interest rates.
He raised the possibility of a recession in a speech on June 7, but also said prospects of a serious downturn were diminishing. He later said there was a growing probability of a “modest adjustment.”
The Commerce Department reported Tuesday that construction of new homes fell in May for the fourth time in five months. While that is fresh evidence of economic weakness, analysts said the housing industry may be stabilizing,
In his remarks Tuesday on Capitol Hill, Greenspan said “history tells us you get a few bumps in the road” as the economy slows to a sustainable pace. “I would have been very surprised if we went smoothly down” from 1994’s booming growth, which he described as “frenetic.”
The economy grew at a 5.1 percent annual rate in the last three months of 1994 and slowed to 2.7 percent in the first quarter this year.