Fed Chief Seen Hinting at New Interest Rate Cut : Economy: Greenspan, sounding gloomy note on recovery, says situation has ‘turned sluggish.’

WASHINGTON —  Federal Reserve Board Chairman Alan Greenspan, sounding a new, gloomier note about the recovery, declared Monday that the economy has “turned demonstrably sluggish” in recent weeks, raising the possibility that his agency may soon nudge interest rates still lower.

“The economy is moving forward, but, in the face of 50 mile-an-hour head winds,” Greenspan said in a speech in Rhode Island. “From all the data . . . it is evident that the economy is rising, but at a pace a good deal slower than one typically sees during (a) recovery.”

Greenspan’s uncharacteristically blunt comments were read on Wall Street as a hint that the central bank may soon lower interest rates again. The bond market rallied and the Dow Jones industrial average surged by 40.70 points to 3,045.62.

The Fed chairman’s remarks came on the eve of a meeting of the central bank’s policy-making Federal Open Market Committee, which is scheduled to review current money and credit policies and decide whether to push interest rates lower.

Even before Greenspan’s comments Monday, many analysts were saying that the panel is likely to reduce interest rates at least once more before the end of the year. The Bush Administration--as well as many private economists--has been urging such a course.

Greenspan’s speech, delivered before a conference at the University of Rhode Island College of Business Administration, echoed statements by Treasury Secretary Nicholas F. Brady and reflected reports from regional Federal Reserve banks that were made public last week.

But the comments marked a significant change on the part of the Fed chairman, who only last July told a congressional panel that there were “compelling signs that the recession is behind us.” At the time, Greenspan shrugged off less sanguine assessments as unwarranted.

Greenspan’s remarks were the latest among a growing number indicating that the recovery is running out of steam and may now be faltering. Some economists have warned that the nation may confront a “double-dip” recession, in which the recovery is followed by another slump.

It may not be immediately apparent if the Federal Open Market Committee decides to nudge interest rates down today. Although such actions often show up in the credit markets within a few days, the actual decisions are not formally announced until several weeks later.

The economy’s lackluster performance has intensified pressure on the Bush Administration and sparked growing demands by Democrats for a new tax cut for the middle class, aimed at spurring more consumer spending.

Some of President Bush’s closest economic advisers have been urging him to put forward a tax-cut proposal of his own. But Bush, who seemed for a while to be on the verge of crafting his own economic package, appeared late last week to have had second thoughts.

Economists are split over the prospect of a new tax-cut program. Some argue that it would put more steam into the economy, but others warn that it could prove to be the worst possible move now because it would bloat the deficit and further erode public confidence.

On Monday, the President--speaking to an American Gas Assn. convention in San Diego by satellite--said that his Administration would fight “tooth and nail” to help stimulate a sluggish economy but said that he would resist any plan that would deepen the federal budget deficit.

“I am not going to jump in and take steps out of some congressional panic that might make the situation worse or might burden future generations of Americans more,” Bush said in his remarks Monday.

The President has come under increasingly heavy fire from critics who say he is not giving enough attention to domestic problems. In a tacit reference to that criticism, Bush insisted Monday: “I know there is a lot to be done. I am not relaxed about the economy.”

On Sunday, Treasury Secretary Brady had said that figures to be published by the Commerce Department today would show that the economy had grown at a 2.5% annual rate during the third quarter--a more robust rate than in the previous period.

Yet, Brady, too, conceded: “It is obvious that the economy is not coming back as strongly as it should.”

Many policy-makers and analysts had believed that the euphoria of the Persian Gulf War would usher in a return to economic vigor. But whatever boost that victory gave the economy had faded away by the end of the summer.

The most recent statistics show business and consumer confidence down and unemployment up. Industries ranging from housing to autos to steel are in a slump.

The Fed’s survey last week said that the economy in September and early October was “weak or growing slowly” and pointed, among other things, to weak retail sales just before the onset of the Christmas season.

It noted also that California’s economy is in even worse shape than much of the rest of the country and is continuing to deteriorate--primarily because of weakness in construction, real estate and defense contracting.