Greenspan - Recession beginning to slacken

WASHINGTON -- Federal Reserve Chairman Alan Greenspan said Thursday there are mounting signs the economy is recovering from recession, an upbeat assessment that encouraged Wall Street.

Conceding that he came across as too gloomy earlier in the month, Greenspan did not include a warning he had made in San Francisco on Jan. 11 that the country continued to face significant economic risks.

Those comments pulled the stock market lower, but Greenspan's more optimistic remarks to the Senate Budget Committee on Thursday helped push stocks solidly higher. The Dow Jones industrial average closed up 65.52 points at 9,796.48.

Asked by lawmakers about his changed tone, Greenspan said he had been trying on Jan. 11 to dampen expectations on Wall Street that the economy would come roaring back this year. He said the rebound will probably be less robust, given that the recession has been a mild one.

"The markets, however, had been assuming a far more rapid snap-back than I, frankly, think is likely to happen," Greenspan said.

But he said he had overdone his pessimism. "That created, unfortunately, I think, phraseology, which in retrospect I should have done differently," Greenspan said. He said his comments implied "that I didn't think the economy was in the process of turning, and I tried to rectify that in today's remarks."

To revive the economy, which slid into recession in March, the Federal Reserve cut short-term interest rates 11 times last year.

"We are just at this particular point turning, as best as I can judge," Greenspan said.

Economists viewed Greenspan's latest comments as a sign that the Fed believes it has reduced rates enough to spur an economic rebound this year. Analysts predicted the central bank would not lower rates again at its next meeting on Jan. 29-30.

"I think they are done cutting rates," said David Wyss, chief economist at Standard & Poor's Co.

Merrill Lynch's chief economist, Bruce Steinberg, agreed. Based on Greenspan's testimony "we are changing our Fed call and now expect the Fed to hold policy steady" at the January meeting, Steinberg said.

Asked whether he thought Congress needed to take more steps to stimulate the economy, Greenspan said he didn't think that was essential given signs of a rebound.

"I do not think it is a critically important issue to do," he said. "I think the economy will recover in any event."

Even so, President Bush still wants Congress to pass an economic stimulus package that includes across-the-board tax cuts.

"Only time will tell" whether the package is needed, said White House spokesman Air Fleischer. "But the president wants to err on the side of helping people."

Linking cuts, surpluses

Greenspan's appearance before Congress came one day after the Congressional Budget Office dramatically lowered its surplus estimate for the next 10 years by $4 trillion to $1.6 trillion. CBO also said the country would run a deficit for the next two years.

Against this backdrop, Greenspan repeated a proposal he made last year: that Congress create a trigger mechanism that would link tax cuts and higher spending with budget surpluses.

"You might again want to consider provisions that, in some way, would limit tax and spending initiatives if specified targets for the budget surplus and federal debt were not satisfied," Greenspan said in his testimony.

While Senate Budget Committee Chairman Kent Conrad, D-N.D., and other Democrats welcomed these comments, Sen. Christopher Bond, R-Mo., said he thought a trigger would be a wrong move, forcing the government to cut back on tax relief or spending at the very time those moves are needed to counter an economic slowdown.

"Is a trigger not in danger of being a bucket of water on a drowning swimmer?" Bond asked.

Greenspan also repeated his belief that lower surplus projections along with the diminished outlook for debt reduction played a role in keeping long-term interest rates firm, even as short-term rates fell sharply last year.

Even with signs of a recovery, the nation's unemployment rate -- now at 5.8 percent -- is expected to continue to rise in the coming months. Greenspan said he supported extending benefits for laid-off workers, something Congress is considering.

Greenspan said the financial controversy surrounding the collapse of Enron will lead to changes in accounting practices and government oversight.

"I suspect there may very well be changes in statutes," he said. "It is crucially important that the trust which is so fundamental to all transactions in a market economy be reinforced."