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Fed words further frustrate markets

Federal Reserve chairman Alan Greenspan said Wednesday that the U.S. economy "is not out of the woods yet," and he left the door open for more interest rate cuts if weak economic growth does not improve or perhaps even slips further.

"Certainly, should conditions warrant, we may need to ease further," Greenspan told the House Financial Services Committee. But he also noted that the Fed already has reduced its target for overnight interest rates by 2.75 percentage points this year, and those reductions coupled with the tax rebates many American households will be receiving in coming weeks "should be increasingly affecting economic activity as the year progresses."

Stock prices fell as investors digested Greenspan's downbeat comments about the economy's continuing weakness and another round of bleak corporate earnings reports. Analysts said Greenspan's comments further frustrated investors, many of whom already believed that an economic recovery was still far off.

"For now, the good news is that the Fed does realize that at least another rate cut is in order, but that does not indicate when capital spending is likely to improve," said Alan Ackerman, a market strategist at Fahnestock & Co.

The Nasdaq Composite Index fell 51.15 points, or 2.5 percent, to close at 2,016.17. The Dow Jones Industrial Average dropped 36.56 points, or 0.3 percent, to 10,569.83. The Standard & Poor's 500-stock index lost 6.73 points, or 0.6 percent, to 1,207.71.

Notably, EMC lost $2.34, to $18.05, after the data storage company posted a 75 percent decline in its earnings and warned that its financial outlook for the third quarter was worse than it was for the second quarter. And shares of AOL Time Warner fell $4.80, to $44.65, after the company reported revenue that failed to meet Wall Street's expectations.

Throughout his testimony, the Fed chairman emphasized the current uncertainty of the U.S. and world economic situation. Nevertheless, he also pointed out that the economic news is no longer mostly negative. The indicators "have turned mixed," he said. "I do think that we are seeing signs that the bottom is beginning to structure itself."

After ticking off a series of problems facing the economy, including excessive inventories that have forced firms to cut production and falling investment in new plants and equipment, Greenspan marveled at the resilience of the U.S. economy.

"While this litany of risks should not be downplayed, it is notable how well the U.S. economy has withstood the many negative forces weighing on it. Economic activity has held up remarkably in the face of a difficult adjustment toward a more sustainable pattern of expansion," he told the committee. Later, he said, "We are still standing."

Whatever the uncertainties, Fed officials continue to expect economic growth, which has been only about 1 percent over the past year, to speed up before the end of the year.

Most of the participants in the Federal Open Market Committee, the central bank's top policymaking group, expect growth from the fourth quarter of last year to the fourth quarter of this year to be between 1.25 percent and 2 percent. Given the economy's very slow pace in the first half of this year _ first quarter growth was at a 1.2 percent annual rate and the second quarter may have been worse _ some of the more optimistic officials are anticipating a growth rate close to 3 percent during the rest of 2001.

The same Fed forecasts show the current 4.5 percent jobless rate rising to between 4.75 percent and 5 percent by the fourth quarter and maybe a bit more in 2002.

As he has in recent public statements, Greenspan continued to play down any risk that inflation is likely to accelerate. Inflation has picked up this year but that increase has not been reflected in other broad price measures, he said.

_ Information from the New York Times was used in this report.