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Federal Reserve Chairman Alan Greenspan on the State of the Economy

Aired July 18, 2001 - 10:17   ET


KYRA PHILLIPS, CNN ANCHOR: And the other top story we've been following all morning, of course, is Alan Greenspan's appearance before the House Financial Services Committee and how that's going to effect the markets.

And that's where we bring in our experts -- CNN's Financial News Anchor Lou Dobbs and managing editor of "MONEYLINE." He's going to check in on business -- hi, Lou.


The Fed chairman's words are already, as you can see on the screen there, beginning to effect markets.

We've seen the Dow erode about 60 points here over the course of the last five minutes -- the Nasdaq down just about 20 points over the last five minutes or so -- the Fed chairman basically saying that we are in for a protracted period of slow economic growth and that, as he put it -- let me just quote the Fed Chairman directly, if I may -- "The period of sub-par economic performance is not yet over. And we are not free of the risk that economic weakness will be greater than currently anticipated and require further policy responses."

Now if I may put the Fed Chairman's words in somewhat more direct language, what he's saying is they don't know how long this period of economic slowdown will continue. They are not certain whether or not the monetary policy measures that have been taken -- specifically, six interest rate cuts in the period of six months -- will have a significant impact sufficient to change the direction of the economy and that a further rate cut may be necessary when the Fed meets on the 21st of next month.

We're going to go first to Christine Romans of the New York Stock Exchange for reaction there. Christine?

CHRISTINE ROMANS, CNN FINANCIAL NEWS: Hi, there, Lou. You know, it's interesting -- the market managed to drift off it's worst levels right as these headlines were crossing and traders on the floor were looking at the ticker and reading these headlines. But then when they saw it was really more of the same, some folks began to get a little bit concerned that this means that the economy is still weak and what will that mean for corporate profits going ahead? And, Lou, that means folks started selling the market again and now we're at fresh session lows for the Dow. More than triple digits on the downside. And this comes amid an awful lot of sensory overload, too. You know, it's the middle of earnings season -- really the beginning of earnings season. And also a couple of economic reports this morning as well. So folks have an awful lot to digest and they point out that the meat of Mr. Greenspan's appearance is the Q&A -- the question and answer session with Congressional leaders and that could have more score for simulative for this market later on today. Lou?

DOBBS: Is it actually as muted there on the floor of the Exchange as it seems to be right now?

ROMANS: It really is. When you watch the volume here -- folks for several days have been telling me that they'd like to see more volume on a week with this much news. With this much for folks to trade on you'd think that volume would be a little more significant. They're pointing out that it really isn't here. They say that breadth -- that is the number of advancing versus declining stocks continues to be negative this morning.

They're going to watch that kind of an indication for just what the fabric of this market is doing. So far it still feels weak.

DOBBS: Well, let's -- Christine, thank you. Christine Romans of the New York Exchange. Let's watch and listen to the Fed Chairman Alan Greenspan. His comments are before the House Financial Services committee.


ALAN GREENSPAN, FEDERAL RESERVE CHAIRMAN: . . .financially assisted going forward by the effects of the tax cut, by folding energy costs, by the spurred production once businesses worked down their inventories to more comfortable levels and most important -- by the inducement to resume increases in capital spending. That inducement should be provided by the continuation of cost saving opportunities associated with rapid technological innovation.

Such innovation has been the driving force -- raising the growth of structural productivity over the last half dozen years. To be sure measured productivity has softened in recent quarters, but by now than one would anticipate from cyclical influences layered on top of a faster long-term trend.

But the uncertainty surrounding the current economic situation are considerable. And until we see more concrete evidence that the adjustments of inventories and capital spending are well along, the risks would seem to remain mostly tilted toward weakness in the economy. Still the Federal Open Market Committed opted for a smaller policy move in our last meeting because we recognized that the effects of policy actions are felt with a lag and with our cumulative two and three-quarter percentage points of easing this year we have moved a considerable distance in the direction of monetary stimulus. DOBBS: The Fed Chairman's comments addressing specifically the issue of 275 basis points reduction in short term rates by the Fed over the course of the past six months. And what the Fed Chairman is saying there is that -- and quite clearly -- that further interest rate cuts may be necessary.

And this is somewhat unusual. It is certainly rare for the Fed Chairman to speak directly to the direction of interest rates even before the House Financial Services Committee.

And the Fed Chairman has acknowledged -- as he said, "Risks would seem to remain mostly tilted toward weakness in the economy." This is again a clear statement that the Fed is very concerned about the pace of economic activity in this country despite pockets of strength that we've seen, housing still is strong -- the consumer still very much engaged in this economy.

But business investment, capital investment certainly a significant drag on the economy as is, in fact, is the technology sector and the markets themselves.

So the Fed Chairman quite clear here that an interest rate reduction -- a further interest rate reduction is certainly a possibility if not a likelihood when the Fed meets again the 21st of next month.

Let's listen to the Fed Chairman again.

GREENSPAN: . . . commencing a growing portion of domestic spending. By early 2000 the surge in household and business purchases had increased growth of the stocks in many types of consumer durable goods and business capital equipment to rates that could not be sustained. Even though demand for a number of high tech products was doubling or tripling annually -- in some cases new supply was coming on even faster.

Overall capacity in high tech manufacturing industries, for example, rose nearly 50 percent last year -- well in excess of its already rapid rate of increase over the previous three years. Hence a temporary glut in these industries and falling short-term perspective rates of return were inevitable at some point.

This tendency was reinforced by a more realistic evaluation of the prospects for returns on some high tech investments, which while still quite elevated by historical standards apparently could not measure up to the previous exaggerated hopes.

Moreover, as I testified before this committee last year, the economy as a whole was growing at an unsustainable pace, drawing further on an already diminishing -- or diminished pool of available workers . . .

DOBBS: The Fed Chairman addressing there the issue of the tech bubble particularly the period 1999 through 2000 and the piercing of that bubble, which has lead to a 60 percent decline in the Nasdaq. One of the -- one of the hurdles and obstacles that the Fed faces as it manages monetary policy is the Fed Chairman is now examining the history which has led to e the policy stance of the Fed -- again, the six interest rate cuts over a period of six months setting the stage for his view that another interest rate reduction is possible.

We will be, of course, following the Fed Chairman's testimony throughout the morning and we will be bringing it to you live here on CNN. I'm Lou Dobbs in New York. Now we go back to Leon and Kyra in Atlanta.

HARRIS: Good deal. Thank you, Lou. We'll get back to you in just a bit. We'll have Lou checking in with us from time to time. And we should note as Lou did moments ago the Dow has been reacting negatively to the comments that we've heard so far come out of Alan Greenspan.

We're going to show you right now a minute by minute chart we've got of the Dow Jones Industrials. We see here as of just a couple of minutes ago it's down now under 10,480. So we'll keep our eyes on that and we'll show you this chart from time to time so you can track it. And don't forget to keep an eye on the scroll we have at the bottom of the screen at all times as well.

We'll be back with more in just a moment.



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