Speaking before the Joint Economic Committee of the U.S. Congress today, Federal Reserve chairman Alan Greenspan defended the Fed’s decision to cut interest rates aggressively last week.

After digesting the Greenspan’s comments, economists at bank of Montreal said that U.S. monetary policy would likely remain on hold for a while.

“The speech highlighted several key messages from the press statement that announced the news of a surprising 50-basis-points rate cut on November 6,” said Sal Guatieri, Senior Economist, Bank of Montreal.

Greenspan said that policymakers acted aggressively to add “insurance” against the “small risk” of prolonged economic weakness. This risk stemmed from uncertainty about geopolitical developments and the impact of past declines in equity values on spending.

Greenspan also noted that consumers have “become more cautious in their purchases” owing to sluggish job growth, though strong gains in productivity and incomes have provided support. As well, business investment, though improving, still lacks “vigor” owing to uncertainty about the economic outlook.”

Greenspan hinted that further rate “insurance” may not be required. He reiterated that the “accommodative stance of monetary policy, coupled with still-robust underlying growth in productivity, is providing important ongoing support to economic activity” and that “the actions taken last week to ease monetary policy should prove helpful as the economy works its way through this current soft spot.”

“Greenspan’s speech had little impact on financial markets,” observed Guatieri. “It is consistent with our view that the Fed will remain on hold at the December 10 policy meeting and in the months ahead. However, we expect the Fed to shift to a tightening stance in mid-2003 as the economic recovery gathers strength and broadens out.”