- The Washington Times - Wednesday, June 4, 2003

In a widely noted speech transmitted by satellite to a meeting of private bankers in Berlin Tuesday, Federal Reserve Chairman Alan Greenspan cited several economic indicators he said should propel growth in the near future. Those included falling oil prices, fast-rising consumer confidence, recent strong gains in the stock market, falling medium- and long-term interest rates and well-timed tax cuts that Congress passed last month.

While noting that “the economy did weaken in March and April,” the Fed chairman asserted that data from May to date suggests that it stabilized. Nevertheless, Mr. Greenspan acknowledged that no “major evidence” confirms that U.S. economic growth has yet begun to accelerate. Mr. Greenspan did reiterate the fact that the Fed was still concerned about the “very low probability” of “corrosive deflation” possibly sending the economy spiraling downward. Under these circumstances, Mr. Greenspan strongly hinted that the Fed “would be far more inclined, as we have been over the last couple of years, to be taking out insurance against economic weakness” by further reducing short-term interest rates. The Fed’s monetary policy-making committee meets in less than three weeks.

At the same meeting in Berlin, Wim Duisenberg, the president of the European Central Bank (ECB), which sets short-term interest rates for the 12-nation eurozone, also strongly hinted that the ECB would finally lower its benchmark interest rate today. With unemployment approaching 9 percent in the growth-starved eurozone and deflationary pressures intensifying as a result of the euro’s recent appreciation, the ECB would do well to lower its target rate by at least half a percentage point to 2 percent.

Regarding the tax cut that President Bush pushed through Congress late last month, Mr. Greenspan, who earlier worried whether the measure could be properly timed, said, “I have to admit that fortuitously this particular cut in taxes is happening at the right time.” Mr. Greenspan favorably observed that the short-term fiscal boost “will create a fairly marked increase in after-tax income in the third quarter.” Given that the Fed is soon likely to make monetary policy more expansionary, his cautious optimism may prove to be well-placed.

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