BUSINESSWEEK ONLINE : DECEMBER 18, 2000 ISSUE
COVER STORY Commentary: Greenspan: This Is Your Captain Speaking... On Dec. 5, four years to the day after warning stock investors about irrational exuberance, Federal Reserve Chairman Alan Greenspan took to the bully pulpit again. But this time the announcement from the economic oracle had an entirely different ring: Beware of irrational pessimism, he as much as warned. In a stunningly direct speech--the equivalent of shouting from the mountaintop for a Fed chairman best known for his opacity--Greenspan declared that the economy is not collapsing. The sigh of relief was audible. While the presidential election mess has left Washington seemingly leaderless, Greenspan reassured the markets that the Fed is on the job. Wall Street liked what it heard, at least initially. The Nasdaq experienced its biggest rise in its 29 years, while Treasury bond prices totted up their best gain in almost four months. So did Corporate America. ''Bush. Gore. Either one, we can work with [him],'' says Ford CEO Jacques A. Nasser. ''Just keep Alan Greenspan doing what he's doing.'' DECELERATION BY DESIGN. Using the venue of a speech to community bankers, the Fed maestro took on the growing chorus of critics who worry that the country may be headed for a recession. He laid out his case that the economy is decelerating by design, not spiraling into an uncontrolled nosedive. While tacitly acknowledging that the soft landing he's engineered for the economy may end up bumpier than planned, he argued that things just aren't as bleak as the pessimists on Wall Street--and on the Bush team--would have it. Behind the extraordinary round of jawboning: fear that excessive pessimism on the part of investors, consumers, companies, and lenders could turn a much desired slowdown into an unwanted slump. Greenspan also made it as clear as a central banker can that the Fed stands ready to cut interest rates. If consumers and companies become too cautious about spending, or if the stock market falls too far, the Fed will be there with easier credit to cushion the fall. His message was meant not only to reassure financial markets but also to signal some of his more hawkish fellow policymakers at the regional Fed banks that it's time for them to fall in line behind their leader. After six rate increases over the past year and a half, a rate cut could come as soon as the Fed's next policymaking meeting on Dec. 19, experts say. Still, it's more likely to occur in January, after the Fed has had a chance to assess the holiday shopping season. But critics charge that it's already too late for a rate cut to be of significant help. ''The odds of a recession are about 60%,'' says Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson in Chicago. ''Even if the Fed were to cut rates today, they could not stop [the downturn] from happening because it takes time for monetary policy to affect the economy.'' Other Wall Street worrywarts are gloomy for different reasons. ''It's not just a monetary policy-induced slowdown,'' says James W. Paulsen, chief investment officer at Wells Capital Management. ''It's coupled with a new-era economic slowdown in tech.'' And while higher rates and tighter financing conditions have played a role in the high-tech shakeout, deeper demand problems will continue to restrain spending on telecoms and PCs regardless of the level of interest rates. Fed officials admit that the satin- smooth landing they had planned for the economy--with growth slowing to 3 1/2% next year from more than 4% this year--now looks unlikely. Oil prices, though down, remain stubbornly high. Corporate profit estimates have been slashed. Inventories of everything from cars to microchips are piling up. And labor costs have been rising. The result: growth next year could come in closer to 2 1/2%. While that's not bad by historical standards, it's well below the heady growth the U.S. has gotten used to. For many consumers and companies, it will feel like a recession. And if they cut back spending accordingly, it could turn into one. By Rich Miller and Laura Cohn Miller and Cohn cover the Federal Reserve from Washington. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS The Tech Slump COVER IMAGE: The Tech Slump CHART: Tech Spending Slowdown TABLE: Angst in the Air Who May Prosper Despite the Fall TABLE: Recession-Resistant Commentary: Tech Leads--Both Up and Down TABLE: Technology Booms and Busts Commentary: Greenspan: This Is Your Captain Speaking... More Bad News for the Naz CHART: Valuations Remain Sky-High Asian Electronics: Who Pulled the Plug? (int'l edition) CHART: Cooling Down INTERACT E-Mail to Business Week Online

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