Greenspan leaves door open for more interest rate cuts

February 05, 1992|By Gilbert A. Lewthwaite | Gilbert A. Lewthwaite,Washington Bureau of The Sun

WASHINGTON -- Federal Reserve Board Chairman Alan Greenspan opened the prospect of a further cut in interest rates yesterday, even as he predicted a sustained recovery starting in this year's second quarter.

In testimony to the House Budget Committee, Mr. Greenspan said, "We expect the amount of monetary ease in the pipeline is adequate to turn the economy onto the path of sustained recovery."

But, noting that assessing the economy is "extraordinarily difficult" now, he added, "We are, of course, continuing to evaluate whether some additional insurance in the way of further monetary ease would be appropriate."

In previous testimony to Congress, Mr. Greenspan appeared to rule out any further reduction in the discount rate, which dropped to 3.5 percent Dec. 20. The drop came after a series of Fed reductions aimed at ending what has become the longest recession since World War II. The discount rate is the interest rate charged by the Fed on loans it makes to member banks.

During his Senate confirmation last week to a second four-year term as Fed chairman, Mr. Greenspan ran into bipartisan criticism for not acting quickly enough to end the recession during his first term.

His hedging yesterday was promptly picked up by Rep. Jerry Huckaby, D-La., who asked, "Are you suggesting that if the leading economic indicators in the next 30 to 60 days continue to stay where they are, that you then would consider further easing" of interest rates.

Mr. Greenspan said his position had not changed over recent weeks, since the Fed's Board of Governors announced after December's discount rate cut that they though enough relief was on the way to return the economy to stable growth.

"But we emphasized -- or I should say I did -- as part of that concept that these are very uncertain times, and we continue to monitor the situation in which, in looking at it, should it appear that that [stable growth] is not in fact occurring, then in our judgment further action is desirable," he said.

A committee staff member said, "I get the impression that the committee would not object to a further cut."

The Federal Reserve's Federal Open Market Committee, which sets policy, met yesterday without making any announcement.

Earlier, the Budget Committee chairman, Rep. Leon E. Panetta, D-Calif., opened the proceedings by wondering whether the Fed was being "overly cautious." With layoffs and consumer concern continuing, he asked, was a further interest rate reduction justified?

"That's the hundred-, thousand-, million-dollar question," said William F. Treacy, chief economist with MNC Financial Inc., the Baltimore bank holding company that owns Maryland National Bank and American Security Bank.

Rate cuts by the Fed over the past year have affected long-term maturity interest rates, which drive mortgage rates, less than short-term rates, which the Fed can more directly influence, Mr. Treacy said.

The Fed doesn't "have the tools to move interest rates that are long-term. They don't have a portfolio of 30-year bonds they can start trading in to force the rate down," he said.

The long-term bond markets remain "skeptical" of economic prospects and particularly of resurgent inflationary pressures, he said.

Asked whether interest rates be lowered again, he said, "I think the key to the answer is how they expect interest rates to help the economy."

The interest rate cuts last year did not stimulate consumers' appetites for new borrowing or credit but were used to lower interest costs through refinancing mortgages and reducing debts.

Mr. Treacy suggested that a "robust" recovery, starting in the second quarter "at the earliest," would be stimulated as debt-reduction savings finally reach people's pockets. "That's going to be a slow process."

Allen Sinai, chief economist with the Boston Co. in New York, noted that the long-term U.S. Treasury bond rate came down marginally after Mr. Greenspan said he was ready to consider another cut in interest rates.

"It was significant as a statement by the market that lower short-term interest rates certainly are preferred at this time," he said. "Market participants don't expect a little more Fed easing to revive or ignite inflation, and feel very comfortable buying long-term Treasury paper on the thought the Fed would ease some more."

Mr. Sinai said he expects the Fed to cut another one-quarter or one-half percentage point off the discount rate in March or April. "The economy is going to need both a little more easing and some fiscal stimulus to get up to the 2 or 3 percent growth level," he said.

Mr. Greenspan told the committee that he does not expect the economy to "tumble into another significant contraction in overall activity."

He cautioned Congress against "bidding wars" with the administration over competing economic recovery packages, urged budgetary restraint and said, "It would be extremely detrimental to our longer-term outlook if this budget process hemorrhaged in an endeavor to come to grips with the admittedly very difficult short-term economic problems that currently confront us."

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