WASHINGTON — Federal Reserve Chairman Alan Greenspan told Congress Thursday that he saw encouraging signs that the country's first recession in a decade could soon end.
"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," Greenspan said in prepared remarks.
Economists viewed Greenspan's remarks as a clear signal that the central bank is now more confident it has done enough to spur an economic rebound. They predicted the central bank, which cut interest rates 11 times last year, will not cut rates at its next meeting on Jan. 29-30.
"Chairman Greenspan changed his tone significantly from downbeat to upbeat," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis. "I think the Fed's easing cycle is effectively over."
Wall Street, which had fallen when Greenspan talked about "significant risks" to the economy in a Jan. 11 speech, rallied strongly on his more optimistic comments Thursday. In late morning trading, the Dow Jones industrial average was up by about 100 points.
Asked about his changed tone, Greenspan said he had been trying on Jan. 11 to dampen expectations on Wall Street that the economy would come roaring back this year. He said the rebound will likely be less robust, given that the recession has been a mild one.
"The markets have been assuming a far more rapid snapback than I have," Greenspan said, while conceding that he overdid his pessimism with some "unfortunate phraseology" which seemed to indicate that he did not believe the recession was in the process of ending.
Asked whether he thought additional economic stimulus was still needed, Greenspan said he did not think it was essential given current signs of a rebound. "I don't think it is critically important to do. I think the economy will recover in any event," he said.
White House spokesman Ari Fleischer said President Bush agreed that there are signs that the economy is rebounding but cautioned that problems remain. For that reason, Bush still wants Congress to pass an economic revival package that includes across-the-board tax cuts.
"Only time will tell" whether the package is needed, Fleischer said, "but the president wants to err on the side of helping people."
In his congressional appearance, Greenspan did defend his policy switch of a year ago before the same Senate committee when he backed large tax cuts given the prospect at the time of a 10-year budget surplus exceeding $5 trillion.
Greenspan noted that the Congressional Budget Office on Wednesday trimmed its surplus estimate by $4 trillion. But he said the prospect of $1.6 trillion in surpluses over the next decade still represented a budget picture that was "considerably stronger" than a decade ago.
On the economy, Greenspan said that the big reduction in unsold business goods in recent months was setting the stage for a pickup in industrial production, which has been falling for more than a year.
The Fed chairman said the signs of an improving economy should bolster business confidence and help support a return to higher business investment spending. It was cutbacks in business investment that helped trigger the current downturn.
"If the recent more-favorable economic developments continue and gather momentum, uncertainties will diminish, risk premiums will fall and the pace of capital investment . . . will increase," Greenspan said.
The Fed's rate cuts last year pushed a key short-term rate to its lowest level in 40 years.
Greenspan repeated a proposal he made last year that Congress chose to ignore: creating a trigger that would tie future tax cuts to the realization of the budget surpluses.
Greenspan's switch last year from urging that surpluses be used to pay down the national debt to saying that some of the money could be used for tax cuts provided key support to Bush, whose biggest economic achievement last year was passage of a $1.35 trillion, 10-year tax cut.