WASHINGTON (REUTERS) — Federal Reserve Chairman Alan Greenspan expressed confidence Wednesday that the U.S. recession was coming to an end but warned the recovery would likely be moderate, boosting hopes the country was in for a stretch of stable borrowing costs.
Bond and stock markets rallied initially as they took the Fed chief’s caution as a clear signal that short-term U.S. interest rates would probably remain at 40-year lows for some time while the central bank assesses economic progress.
In his eagerly awaited semi-annual testimony on the state of the economy to the House of Representatives Committee on Financial Services, Greenspan said there were mounting signs economic activity was starting to firm. But he also cited a number of factors that could restrain spending ahead.
“Despite the disruptions engendered by the terrorist attacks of Sept. 11, the typical dynamics of the business cycle have reemerged and are prompting a firming in economic activity,” Greenspan said.
But he tempered this by adding: “An array of influences unique to this business cycle, however, seems likely to moderate the speed of the anticipated recovery.”
In its semiannual set of economic forecasts, the Fed projected that Gross Domestic Product, the broadest measure of total economic activity, will grow by about 2-1/2 to 3 percent this year. That would mark a sharp improvement from a lackluster 1.1 percent expansion in GDP during 2001, the most sluggish performance since a contraction of 0.5 percent in 1991.
During questioning, the influential Fed chairman said that economic data from the current first quarter suggest GDP is currently growing, and that while the economy is not yet “over the hump with respect to unemployment, we’re approaching it.”
A poll by Reuters of primary dealers — firms that deal directly with the Fed — found that 22 of 24 firms anticipate unchanged interest rates through mid-year. Dealers were unanimous in their belief that policymakers will keep rates on hold at their next interest rate meeting, set for March 19.
While sounding more optimistic than earlier in the year that the recession, which officially began last March, was ending, Greenspan made clear he did not expect rip-roaring growth rates ahead.
Stock markets rose during the testimony as investors honed in on the Fed chief’s assessment that the worst was past, but profit-taking later wiped out most of the gains. The Dow Jones industrial average finished with a gain of just 12.32 points at 10,127.58, after surging to 10,255 earlier in the session.
