Washington — Federal Reserve Chairman Alan Greenspan said Wednesday the economy had hit a "soft patch" as corporate accounting scandals and a possible war with Iraq have shaken consumer and business confidence.
Greenspan made clear in testimony to Congress that the Fed would not hesitate to cut interest rates further if necessary to bolster the wobbly economy. But he also indicated that the central bank believes the most likely economic outcome is a return to stronger growth next year.
If the economy does rebound, Greenspan said, the Fed is ready to quickly reverse course and begin raising interest rates to make sure that the extraordinarily low interest rates of the past year do not drive prices higher.
The central bank last week reduced its target for overnight bank loans by a half-point to 1.25 percent, the lowest level since July 1961.
It was the Fed's first rate move since last December. Commercial banks responded by pushing their prime lending rate down by a half-point to 4.25 percent, the lowest point since May 1959 for this benchmark for millions of business and consumer loans.
Greenspan explained Wednesday that the central bank felt the need to respond aggressively to a variety of factors depressing growth, ranging from the fallout from the corporate accounting scandals and the big drop in stock prices to rising worries about a possible war with Iraq.
"Over the last few months, these forces have taken their toll on activity and evidence has accumulated that the economy has hit a soft patch," Greenspan said.
Wall Street took Greenspan's comments Wednesday in stride, with investors focusing their attention on the news that Iraq has agreed to a U.N. resolution calling for weapons inspections.
Private economists interpreted Greenspan's comments as an indication that the Fed believes it has done enough to insure the current slowdown will not worsen into a double-dip recession. They believe the central bank will leave rates unchanged when policy-makers meet Dec. 10.
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