Newspaper article THE JOURNAL RECORD

Greenspan: Economy Passes `Maxcimum Risk' of Recession

Newspaper article THE JOURNAL RECORD

Greenspan: Economy Passes `Maxcimum Risk' of Recession

Article excerpt

WASHINGTON (AP) _ The economy has passed the "point of maximum risk" of a recession, Federal Reserve Chairman Alan Greenspan declared Wednesday. But his suddenly upbeat assessment sent financial markets reeling.

The Dow Jones industrial average plunged 57.76 to close at 4,628.52 after having been down as much as 132 points in a wild trading day.

In addition to a loss of faith in high-technology stocks, analysts said, the market was disappointed in Greenspan's comments, which they read as a signal that further interest rate cuts won't be forthcoming.

"We are getting whipsawed," said Sung Won Sohn, chief economist at Norwest Corp. in Minneapolis. "We were looking for encouragement that there will be additional declines in interest rates and instead Chairman Greenspan talks about how wonderful the world is."

While Greenspan did not totally rule out a recession in delivering the Fed's midyear outlook to Congress, he cited a number of recently encouraging signs that the economy had regained its footing.

The comments were in contrast to Greenspan's own warnings June 20 that the risks of a recession had increased. Those statements were followed on July 6 by the first interest rate cut by the Federal Reserve in nearly three years.

The tiny quarter-point reduction in the federal funds rate was matched by a similar cut in commercial banks' prime lending rate, meaning lower borrowing costs for millions of Americans. Financial markets staged huge rallies with the Dow surging over the 4,700-level as investors believed further rate cuts were in store.

Greenspan's comments Wednesday came as he delivered the Fed's twice-a-year economic outlook to Congress.

The new Fed forecast predicted the economy would slow to growth of around 1.5 percent to 2 percent this year but rebound next year to around 2.5 percent growth, considered the optimum expansion rate to keep unemployment low without raising inflationary pressures.

"Alan Greenspan is saying that we have virtually reached the promised land of a soft landing with 2.5 percent growth and well-behaved inflation," said David Jones, economist at Aubrey G. Lanston Co. …

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