WASHINGTON (AP) — Offering hope of further interest-rate cuts, Federal Reserve Chairman Alan Greenspan warned on Wednesday that a “fear-induced psychological response” gripping the world’s financial markets is bound to cramp the U.S. economy.
But he told a group of business economists: “This is a time for monetary policy to be especially alert.”
His comments almost interrupted a string of stock-market losses that have occurred this week as the annual meetings of the International Monetary Fund failed to produce a clear strategy to combat the crisis.
The Dow Jones average of industrial stocks shot up 113 points immediately after his speech, then settled back and closed at 7,740, down three points.
In an effort to support borrowing and spending, Federal Reserve policy-makers last week cut the benchmark interest rate on overnight loans between banks by a quarter of a percentage point. They meet again Nov. 19.
“Between now and next spring, I wouldn’t be surprised to see three more cuts,” said economist Sung Won Sohn of Norwest Corp. in Minneapolis.
Last week’s Fed action came a month after the collapse of the Russian ruble, which triggered what Greenspan called a “quantum shift” in market sentiment marked by plunging stock prices and a worldwide flight from risky investments.
The drop in U.S. stock prices since a midsummer peak, partly offset by increased bond prices, has destroyed $1.5 trillion in wealth held by U.S. consumers and businesses, Greenspan said.
So far that doesn’t seem to have significantly hurt the broader economy or job market, he said, “but we’re bound to see a major impact in personal consumption expenditures and housing.”