Dr. Sherry Cooper, chief economist at BMO Nesbitt Burns, suggests that Fed chairman Alan Greenspan’s performance before Congress today indicates at least another 25 basis points in easing, maybe more.

“As usual, the chairman’s comments are largely impenetrable and obfuscatory, but looking through the rhetoric, I expect further Fed easing,” says Cooper in a special report following the chairman’s testimony. “I see another 25 basis point rate cut at the August 21st FOMC meeting, and possibly more still before yearend if ‘conditions warrant’.”

Cooper says that Greenspan reiterated the Fed’s view that the risks to the U.S. economy remain “mostly tilted toward weakness”, and this will be the case until we see more concrete evidence that a reduction in excess inventories and excess capacity is well underway.

She says that, considering yesterday’s industrial production numbers, “it will be some time yet before excess capacity is worked off sufficiently to trigger a reemergence of positive capital spending growth. The capacity utilization rate, which has plunged in both tech and non-tech manufacturing, is an important measure for the Fed because it is a bellwether for pricing power. There is still no sign of its bottoming.”

According to Cooper, Greenspan asserted his view that a period of substantial liquidation of technology inventories still lies ahead, notably in computers, semiconductors and especially communications products.

Greenspan also insisted that the Fed is committed to low inflation conditions. “This morning’s CPI figures for June were disappointingly strong, raising once again the spectre of stagflation. Nevertheless, the overall weakening in the economies of Asia, Europe and Latin America, the decline in energy and other commodity prices, and the strengthening U.S. dollar certainly point to declining inflation in coming months.”

She says that demand for capital equipment will remain weak; the reduction in corporate profitability has also contributed to the cancellation of investment plans as well as the surge in layoffs, which will likely continue for some time; consumer spending growth may be next to go. “While noting that the 275-basis-point reduction in short-term interest rates this year takes time to work its way through to the economy, the risks continue to be tipped toward sub-par economic growth.”