Fed Chief Expects More Growth But Markets Retreat After Greenspan’s Remarks

Federal Reserve Chairman Alan Greenspan did it again.

For the second time in six months, Greenspan’s upbeat assessment of the U.S. economy sent stocks and bonds plunging as investors concluded the central bank is unlikely to lower interest rates any time soon.

“A number of fundamentals point to an economy basically on track for sustained growth,” Greenspan told a House Banking Committee panel. “Any weakness is likely to be temporary.”

Analysts said that’s a signal the pressure is off the Fed to extend its string of three cuts in the last half year in the overnight bank lending rate. “The market is looking to the other side of the valley,” now that the threat of recession has retreated, said Robert Dederick, an economic consultant at the Northern Trust Co. in Chicago.

At the same time, the Fed “expects continuation of a reasonably good inflation performance in 1996,” Greenspan said in his semiannual Humphrey-Hawkins report to Congress. “The years ahead should see further progress against inflation and the eventual achievement of price stability,” he said, when costs for goods and services barely budge.

This combination of events is usually a prescription for a market rally. Not Tuesday. The benchmark 30-year bond fell almost two full points in late New York trading. “It’s been an absolute disaster,” said John Burgess, who helps manage $70 billion in bonds at Bankers Trust Investment Management in New York.

And the Dow Jones Industrial Average, down as much as 70 points in midafternoon trading, fell 44.79 points for the day to close at 5458.53.

Greenspan, true to form for his congressional appearance, also dropped a hint that the Fed hasn’t ruled out more rate cuts even if growth accelerates - as long as inflation doesn’t pick up. “The Federal Reserve would certainly welcome faster growth - provided that it is sustainable,” he said.

Even so, analysts said the overall tone of his appearance was clear. “There’s not a lot of hope for further substantial easing in monetary policy,” said former Fed Gov. Lyle Gramley, now a consulting economist at the Mortgage Bankers Association of America. Added Scott Brown, an economist at Raymond James & Associates in St. Petersburg, Florida: “I’m shocked by the tone of it. It’s decidedly bullish on the economy.”

Greenspan also repeated his call for Congress and the White House to reach agreement on a balanced-budget plan, saying it would cause interest rates to fall.

“If the agreement is finally reached - and it is credible - interest rates will fall quite a bit further,” Greenspan said. “If we fail, and lose interest in resolving the issue, I think long term rates could back up some.”

Greenspan attributed the decline in borrowing costs in last year’s second half to the widespread belief that Republican lawmakers and the administration would balance the budget.

While refraining from direct comment on Greenspan’s forecast, White House press secretary Mike McCurry said the Clinton administration is “confident” the country will see moderate economic growth, low inflation and low rates of unemployment for the balance of the year.

The economy will continue to expand even if the Fed refrains from further rate cuts, McCurry said. “Those projections are not based on external stimuli,” he said.

Greenspan said the Fed’s own forecast is for the economy to grow at a 2.0 percent to 2.25 percent rate this year, in line with White House projections and little changed from last year’s performance.