Alan Greenspan defended the
half-point rate cut Wednesday, saying the risks of injecting too little liquidity into the economy outweighed the risks of injecting too much. Greenspan also downplayed the risk of deflation.
The statements came in a question-and-answer session following prepared testimony to Congress in which the Federal Reserve chairman repeated much of the language the Federal Open Market Committee used in explaining the 50-basis-point cut last Wednesday.
Greenspan said the easing was needed because the economy had hit a "soft patch" exacerbated by falling stock prices, the risk of war and an economy in which "households have become more cautious in their purchases, while business spending has yet to show any substantial vigor."
"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. "It was in this context that the Federal Open Market Committee further reduced our target federal funds rate last week."
The FOMC's 12th consecutive rate cut, which took fed funds to 1.25%, its lowest level in 41 years, "should prove helpful as the economy works its way through this current soft spot,'' Greenspan said.
Responding to questions, Greenspan said the risks of deflation are "extraordinarily remote" and reiterated that the Fed has other weapons to stimulate the economy beyond rate cuts, among them the purchase of Treasury bonds.