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Fed Easing Now Likely As "Insurance' Policy, Greenspan All But Says; Addressing Deflation Fears; Could buy back T-bonds; chairman says economy seems poised to turn up.(A)
Byline: JOSEPH GUINTO
Federal Reserve Chairman Alan Greenspan hinted strongly Tuesday that the central bank will cut rates later this month as an insurance policy against deflation.
At the same time, the Fed chairman said the economy stabilized in May and is poised to turn around. But he hedged his view on when or how strong.
His remarks triggered sharp gains in bonds and drove the yield on the two-year Treasury note below the fed funds rate of 1.25%, a sign that markets expect a rate cut. Stocks scored modest gains.
"The acceleration has not yet begun," Greenspan said, "even though, obviously, the marked moves of the stock market in recent weeks, and especially in the credit markets, are suggesting a fairly marked turnaround."
Greenspan said deflation -- a broad decline in prices that can erode corporate profits and lead to job cuts -- is unlikely but may be a sufficient threat to warrant Fed steps to head it off.
"All in all, we are looking at a low-probability event," the Fed chief said in remarks sent by satellite to a meeting of central bankers in Berlin. "But if it happens, our concerns are such that it could be a significant event for which we will require insurance."
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