Greenspan expects slump to be short Bank of America cuts prime to 8.75%

February 21, 1991|By Stephen E. Nordlinger | Stephen E. Nordlinger,Washington Bureau of The Sun

WASHINGTON -- In what he admitted was a highly cautious forecast, Federal Reserve Chairman Alan Greenspan said yesterday that he had detected signs the recession would end "reasonably soon," although he emphasized that the economy is continuing to shrink.

Delivering the Fed's semiannual report to Congress, Mr. Greenspan came under pressure from members of the Senate Banking Committee to continue the central bank's policy of aggressively lowering interest rates to revive the economy.

But Mr. Greenspan refused to tip his hand, conceding at one point that he was being "purposefully slightly evasive." But the overall import of his three hours of testimony appeared to be that the Fed, after lowering short-term rates sharply in recent months, was pausing.

"We want to come out of this recession on a non-inflationary track so that we will not be immediately confronted with accelerating inflation, a monetary crunch and another recession quickly following," he said.

After the financial markets closed yesterday, San Francisco-based Bank of America said it was cutting its prime lending rate to 8.75 percent from 9 percent. On Feb. 1, major banks cut their prime lending rates to 9 percent from 9.5 percent.

The prime is the rate of interest a bank charges its best customers and also is a key benchmark for interest rates on many types of consumer loans, such as adjustable-rate mortgages. A lower prime can make loans easier to afford and stimulate economic activity.

Mr. Greenspan testified after the Labor Department reported that the Consumer Price Index, excluding volatile food and energy prices, soared 0.8 percent last month.

That "core" rate is considered a more reliable gauge of long-term inflationary trends than the overall CPI, which went up 0.4 percent in January.

The Commerce Department also reported a sharp 12.8 percent decline in housing starts last month, to the lowest level since the 1981-1982 recession. Housing starts totaled a seasonally adjusted annual rate of 850,000 units, the lowest since construction began on 843,000 units in January 1982.

Retail prices in the Baltimore area, as measured by the Consumer Price Index for All Urban Consumers, rose 0.3 percent over the last two months, the U.S. Bureau of Labor Statistics reported yesterday.The energy portion of the index declined 3.4 percent over the same period.

In his testimony, Mr. Greenspan did not comment on the latest economic statistics, but he said that the recent sizable decline in oil prices has improved the near-term outlook for inflation and the economy.

Because the Persian Gulf war makes forecasts hazardous, he said, "it would be unwise to rule out the possibility that the recession may become more serious than is already apparent."

But he emphasized that "the balance of forces does appear to suggest that this downturn could well prove shorter and shallower than most prior postwar recessions." The average length of the eight earlier downturns was 11 months.

In its official forecast for the 1991 economy, the Federal Reserve said it expects the gross national product, after adjusting for inflation, to grow a sluggish 0.75 percent to 1.5 percent between the final three months of 1990 and the last quarter of this year.

The Fed forecast that the Consumer Price Index would rise a moderate 3.25 percent to 4 percent and that the unemployment rate would go up to 6.5 percent or 7 percent. Unemployment was 6.2 percent last month.

Because of the hard-to-fathom economic crosscurrents, Mr. Greenspan, a devotee of economic statistics, presented a picture to the Senate panel of Fed officials latching onto each morsel of federal data to try to gauge the economy.

"We are following the economy not only on a daily basis but, I will tell you, on an hour-by-hour basis with an extraordinary amount of data," he said.

He recalled sitting before a computer the night the gulf air war began to determine whether oil facilities were damaged and how the markets would react to the attacks.

In presenting a cautiously optimistic outlook, Mr. Greenspan cited "gradually emerging positive consumer attitudes" and a rise in the once-anemic money supply.

The Fed might shy away for now from lowering short-term rates, but Mr. Greenspan stressed his growing concern over the credit crunch, reflected in the tight lending policies of commercial banks.

"The credit crunch," he said, "is the most critical thing confronting monetary policy at this particular stage."

Mr. Greenspan confirmed earlier reports that Treasury Secretary Nicholas F. Brady was about to issue new guidelines to bank regulators that would address banks' concerns that federal supervisors had contributed to loan cutbacks by being too strict in carrying out federal lending rules.

Although Mr. Greenspan declined to specify proposed changes, officials said regulators would be encouraged, when judging the value of bank real estate loans, to look at the long-term value of assets and not just the current value in a depressed market.

Because of mounting bad loans, banks have been pulling back from new lending, which has contributed substantially to the economic downturn.

The Fed has lowered short-term interest rates aggressively to improve bank profits, but Mr. Greenspan conceded that bank lending remains "tight."

He also said that President Bush's proposal to create a commission to study a capital gains tax cut would be "useful." Mr. Greenspan was asked to head the panel, but congressional Democratic leaders have objected to that idea.

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