Greenspan's testimony suggested there are more rate cuts in the offing, but he gave no strong indication of the extent. He said there are still near-term risks to the economy and the retrenchment may take sometime to run its course, but suggested the downside may be limited, with consumer confidence seemingly stabilizing at a level consistent with economic growth.
He sees the abrupt fall in consumer confidence like "water backing up against a dam that is finally breached, ... but for now it remains at a level that in the past was consistent with economic growth." Greenspan also sees "downside risks" predominating at the FOMC (restating current policy bias) and warns additionally that "foreign economies appear to be slowing, which could damp demands for exports." He suggests that while financial markets have repaired somewhat in recent weeks, there remains lender nervousness in other markets. He also warns that rising energy costs have compounded household and business costs, and represent some permanently lost growth sent to overseas producers whose demand for U.S. exports may not compensate. He holds out hope that the recent decline in energy prices and implied in futures will continue and bolster a recovery in demand.
The Fed chairman's prepared text highlights two key factors as to whether the economy will recover in a relatively short order like in 1998 or linger in a more depressed state a la 1990. Yet both forces are not easy to predict – the first factor is the extent that business investment slows vis-à-vis tech-related capital expenditures. Over the past few years this has contributed to above-trend GDP growth and favorable productivity gains. Tech bellwether Cisco's recent warning, as well as a rise in layoffs reports, increases the uncertainty surrounding tech-sector inventory corrections vs. the already hard landing for non-tech manufacturing. As for the second factor, private sector confidence, Greenspan notes that consumer sentiment has fallen rapidly but not to levels consistent with a recession.