Thursday, February 27, 2003

Drop in confidence 'significant'

Unsurprising, Greenspan says

By Marcy Gordon
The Associated Press

WASHINGTON - Federal Reserve Chairman Alan Greenspan said Wednesday that this month's drop in consumer confidence to the lowest level in almost a decade was "a very significant decline" but not a surprise.

Indicators of consumer confidence tend to be affected by events which consumers are deeply aware of, such as the recent sharp rise in gasoline prices and prospects of a war with Iraq, Greenspan told the Senate Banking Committee at a hearing.

The Consumer Confidence Index, released Tuesday, fell to 64.0 - its lowest reading since October 1993 - from 78.8 in January as Americans grew increasingly worried about the effects of a possible war on jobs and oil prices, the Conference Board business group reported Tuesday. Analysts were predicting a reading of 77.0.

Treasury Undersecretary Peter Fisher, testifying at the hearing with Greenspan, said the report underscored the need for policy-makers to work to enhance economic growth. Fisher also cited several bright spots in the economic picture, such as continued strong consumer spending on big-ticket items and recent company earnings reports that are somewhat better than expected.

Greenspan said the plunge in consumer confidence was significant in terms of its magnitude but that it wasn't surprising that it declined. He spoke about the new confidence report at a hearing Wednesday devoted to proposals to overhaul the deposit insurance system.

Greenspan reiterated the central bank's opposition to raising the $100,000 limit on deposit insurance coverage, saying there would be no "clear public benefit" to the move.

The Federal Deposit Insurance Corp. and several lawmakers in Congress have proposed pegging the limit to inflation as part of an overhaul plan.

The FDIC says the $100,000 limit on insurance coverage has been eroded by inflation to only half of what it was worth in 1980 and should be pegged to the Consumer Price Index.

Greenspan, however, has said that doing so would provide a subsidy for wealthy people.

Speaking for the Federal Reserve, Greenspan told the Senate Banking Committee: "In our judgment, neither financial stability, nor depositors ... are being disadvantaged by the current ceiling."

Raising the limit would extend the government's subsidy to banks and "reduce the incentive for market discipline without providing any clear public benefit," Greenspan said in testimony prepared for a hearing.

Officials of smaller banks, especially, have pushed for an increase in the ceiling, which they say would help them attract deposits and compete with larger institutions.

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