Fed chairman hints at US rate cut

Federal Reserve Chairman Alan Greenspan foresees no quick end to sluggish economic growth in the United States and has signalled that the Fed stands ready to cut interest rates for a seventh time this year.

‘‘The period of subpar 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 response,’’ Greenspan told the House Financial Services Committee in his twice-a-year report on the US economy.

In an effort to stave off recession, the Federal Reserve has cut interest rates six times this year, totalling 2.75 percentage points. It has been the most aggressive credit-easing campaign in nearly two decades.

Greenspan expressed hope that the Fed’s actions, combined with falling energy costs and soon-to-be sent out tax rebate cheques, would bolster an economy stuck in low gear for a year.

‘‘The rate of deterioration is clearly slowing,’’ Greenspan said.

Although he offered some encouraging comments, he cautioned: ‘‘The risks would seem to remain mostly tilted toward weakness in the economy.’’

That is likely to be the case, he said, until there is more evidence that businesses get their excess stock in line with sales and companies increase investment in computers and other hi-tech equipment.

Much of the slowdown comes from businesses sharply cutting back on production and on capital spending in the face of sagging demand. Economic upheaval in other countries, coupled with rising energy prices last year into this year, intensified the problem and drained the purchasing power both of businesses and consumers, Greenspan said.

‘‘Certainly, should conditions warrant, we may need to ease further, but we must not lose sight of the prerequisite of longer-run price stability,’’ Greenspan said.

Economists viewed Greenspan’s remarks as a signal that an additional interest rate cut could come as soon as the Fed’s next meeting on August 21. But they believe the Fed, wary of inflation down the road, would limit any further rate reductions to more conservative quarter-point moves.

On Wall Street, investors, frustrated by signs that an economic rebound will take longer to materialise, drove stocks lower.

Economists said Greenspan’s tone was a bit more dour than they expected and that the market was reacting to that.

Fed policy-makers, in their economic report, forecast that the economy’s growth would slow this year to around 1-2% but pick up next year, expanding by 3-3.5%.

Before Greenspan testified, the government reported that the consumer price index, a closely watched inflation gauge, rose 0.2% in June, while the costs of petrol and other energy products retreated. Electricity prices, however, showed a record rise.

Housing construction, a pillar supporting the economy, posted a strong 3% increase, a second government report showed.

Even with the rise in the consumer price index, ‘‘there’s very little inflation in our economy’’, Greenspan said during the hearing. Fed policy-makers, though, must remain vigilant to price pressures, he added.

Consumers, whose spending accounts for two-thirds of all economic activity, have been a main force keeping the economy afloat. Household disposable income ‘‘is now being bolstered’’ by President George Bush’s new tax cuts, Greenspan said. He did not elaborate.

He also referred to the risk of reduced consumer spending in the next few quarters. The sagging stock market has reduced household wealth and is likely to restrain consumer spending in the future. A weaker labour market also could restrict spending.