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Clearly, some slowing in the pace of spending was necessary and expected if the economy was to progress along a balanced and sustainable growth path. But the adjustment has occurred much faster than most businesses anticipated, with the process likely intensified by the rise in the cost of energy that has drained business and household purchasing power.

Purchases of durable goods and investment in capital equipment declined in the fourth quarter. Because the extent of the slowdown was not anticipated by businesses, it induced some backup in inventories, despite the more advanced just-in-time technologies that have in recent years enabled firms to adjust production levels more rapidly to changes in demand. Inventory- sales ratios rose only moderately, but relative to the levels of these ratios implied by their down trend over the past decade, the emerging imbalances appeared considerably larger. . . .

The exceptional weakness so evident in a number of economic indicators toward the end of last year, perhaps in part the consequence of adverse weather, apparently did not continue in January. But with signs of softness still patently in evidence at the time of its January meeting, the F.O.M.C. retained its sense that the risks are weighted toward conditions that may generate economic weakness in the foreseeable future. Crucial to the assessment of the outlook and the understanding of recent policy actions is the role of technological change and productivity in shaping near-term cyclical forces as well as long-term sustainable growth.

The prospects for sustaining strong advances in productivity in the years ahead remain favorable. As one would expect, productivity growth has slowed along with the economy. But what is notable is that, during the second half of 2000, output per hour advanced at a pace sufficiently impressive to provide strong support for the view that the rate of growth of structural productivity remains well above its pace of a decade ago.

Moreover, although recent short-term business profits have softened considerably, most corporate managers appear not to have altered to any appreciable extent their longstanding optimism about the future returns from using new technology. A recent survey of purchasing managers suggests that the wave of new online business-to-business activities is far from cresting. Corporate managers more generally, rightly or wrongly, appear to remain remarkably sanguine about the potential for innovations to continue to enhance productivity and profits. . . .

It is difficult for economic policy to deal with the abruptness of a break in confidence. There may not be a seamless transition from high to moderate to low confidence on the part of businesses, investors and consumers. Looking back at recent cyclical episodes, we see that the change in attitudes has often been sudden. In earlier testimony, I likened this process to water backing up against a dam that is finally breached. The torrent carries with it most remnants of certainty and euphoria that built up in earlier periods.

This unpredictable rending of confidence is one reason that recessions are so difficult to forecast. They may not be just changes in degree from a period of economic expansion, but a different process engendered by fear. Our economic models have never been particularly successful in capturing a process driven in large part by nonrational behavior. Although consumer confidence has fallen, at least for now it remains at a level that in the past was consistent with economic growth. . . .

Still, as the F.O.M.C. noted in its last announcement, for the period ahead, downside risks predominate. In addition to the possibility of a break in confidence, we don't know how far the adjustment of the stocks of consumer durables and business capital equipment has come. Also, foreign economies appear to be slowing, which could damp demands for exports; and, although some sectors of the financial markets have improved in recent weeks, continued lender nervousness still is in evidence in other sectors. . . .

SENATOR DODD There's nothing ?there's nothing in the way this [President Bush's tax-cut proposal] is arranged that's going to kick-start an economy, based on by the time it gets implemented, it's usually ?it's outside the time frame when such a kick-start might actually

MR. GREENSPAN Except for the low probability that the any recession that might occur is prolonged. It's only under those conditions that I envisage it to be an insurance premium, in effect, because we use insurance for low probability events and, in that regard, it would act positively. But aside from that, I have not been able to find a useful means of employing it to fend off a recession. In other words, if a recession is going to happen ?and I must say to you, it's not happened yet ?it's very unlikely to be affected one way or the other by what tax policy is going to be because the determination of a trigger as to when ?I shouldn't use the word "trigger" ?the determination of the point at which the markets determine whether we're flattening out or stabilizing or falling, that's way before the implementation of any tax cut that I can envisage happening.

Q. And you haven't changed ?I mean, the definition of when a recession is occurring, is it still the classical definition of the two quarters

A. It's roughly that. The only difficulty that you're going to have in these types of definitions is that when somebody examines when the recession began, it's usually well before the economy actually breaks down. In other words, the economy will often start moving lower and a goodly ?a great deal of the time, will then start back up.

And so that particular peak will never be discussed as the peak of a business cycle. But it goes down and continues down, you only recognize that you're in a recession well off the peak. But in retrospect, it'll always be that the beginning of a recession is supposedly at that peak. My argument is that indeed we weren't really in a recession in that short period. It's only when the break in confidence occurs that any meaningful definition of a recession is there. But that is not the usual definition. The usual definition, as you indicated, is any two quarters of negative economic growth.

Q. Right. And we are not in a recession.

A. At the moment, we are not.