Capital Markets

Parade of Rate Cuts May Be Coming to an End

Federal Reserve Board Chairman tells Senate committee economy appears to be "firming." Translation: don't expect a rate cut next week.
John GoffJanuary 24, 2002

It’s been a long time coming, but Federal Reserve Bank Chairman Alan Greenspan now appears fairly upbeat about the U.S. economy. At least, that’s the impression Greenspan gave when he testified in front of the Senate Budget Committee this afternoon. “There have been signs recently that some of the forces that have been restraining the economy over the past year are starting to diminish and that activity is beginning to firm,” said Greenspan.

Among other things, Greenspan noted that corporations are lowering their inventories of unsold goods. That, in turn, should lead businesses to increase production and hire more workers. The Central Banker did warn, however, that the rally in production could be short-lived if demand doesn’t also go up.

Nevertheless, Greenspan’s remarks were greeted much more warmly by investors than his earlier comments of Jan. 11. As you recall, those remarks were widely perceived as a thumbs-down on the prospects for a recovery. But following Greenspan’s testimony today, the U.S. equity markets shot up. As of 4:00, the DJIA had gained over 70 points, and the Nasdaq Composite was up nearly 1.5 percent on the day.

Given Greenspan’s testimony, economists say it’s more likely that officials at the Federal Reserve won’t lower the Fed Fund rate when they convene their next policy meeting on Jan. 29. That’s a big switch from what anlaysts were predicting after Greenspan’s remarks of Jan. 11. At the time, many Wall Street economists believed Greenspan’s remarks indicated the Fed would lower rates once again. Of the earlier speech, Greenspan told the Senate committe: “That created, unfortunately, phraseology, which, in retrospect, I should have done differently, that implied I didn’t think the economy was in the process of turning. And I tried to rectify that in today’s remarks.”