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Greenspan Reports To Congress

In Washington, late July is time for the "four h's": heat, humidity, and Humphrey-Hawkins.

And that means Wall Street will be sweating until Tuesday at exactly 10 a.m. (EDT), when Federal Reserve Chairman Alan Greenspan delivers his semiannual report - called Humphrey-Hawkins testimony - on the U.S. economy.

Greenspan will tell the members of the Senate Banking Committee that he got it just right in February's testimony. Greenspan said then that the risks of continued, unsustainably fast growth and a sharp slowdown under the weight of the Asian depression were evenly balanced.

As it turns out, the American economy turned in another amazing performance in the first quarter, growing 5.4 percent. But then the drag from Asia, compounded by an unanticipated inventory buildup, began to slow the U.S. economy. Some economists have talked about zero or negative growth in the just-concluded second quarter. And the third quarter could be slower yet if the strike at two General Motors parts plants in Flint, Mich., doesn't end soon.

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In his testimony, Greenspan will focus on the future, not the past, economists say. And he is likely to emphasize the domestic economy and not dwell on Asia's troubles.

"With inflation and interest rates low, and the lowest unemployment rate in decades, the economic fundamentals remain positive," said NationsBanc Montgomery Securities senior economist Peter Kretzmer.

On the subject of the economy's slowing, Kretzmer said, "They've been predicting a slowdown for three years, and now it's slowing."

Kretzmer said Greenspan will give a clear signal that the Fed is on hold for now, for both domestic and international reasons. "He's made the right moves so far," Kretzmer said.

"The domestic economy doesn't call for higher interest rates," said Sung Won Sohn, chief economist at Norwest Corp. "And the international situation doesn't call for higher rates, either."

On the other hand, even though the economy is slowing, Greenspan "won't give any impression that rates will be cut," Sohn said. "There's such strong pressure within the [Federal Open Market Committee] to raise interest rates; he's held the line on that."

Kretzmer said no rate cut is necessary to keep the U.S. economy from slipping into recession. "The inventory buildup is just an imbalance" that has reduced production only temporarily, he said.

Greenspan "won't suggest any cuts in interest rates," agreed Cynthia Latta, an economist at DRI/McGraw-Hill, adding that she believes the Fed chief will emphasize that the GM strike is temporary and that the Asia crisis will also be temporary, if protracted. Latta estimated that the Asian economies will take two or three years to turn around.

Kretzmer said Greenspan still believes fighting inflation is the Fed's priority: "He remains very concerned about labor markets."

"The biggest risk is complacency," Kretmer said. People have become accustomed to thinking of an economic slowdown as necessarily leading to lower inflation, but, he warned, "both things can get worse at the same time."

Kretzmer, though, said he isn't worried about a long-term slowdown. "In the long run," he said, "the strength of the economy always depends on demand."

Written By Rex Nutting

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