Greenspan Sees More Budget Deficit Shocks

Federal Reserve chairman Alan S. Greenspan warned today that financial markets are vulnerable to further shocks from the U.S. budget deficits, downplaying the role that the Fed can play if fiscal authorities are irresponsible.

But his remarks to the National Council of Savings Institutions gave no clear sign whether the Fed has tightened credit to boost the dollar, as speculated in the financial amrkets in recent days.

Greenspan said careful money supply policies are needed to foster economic growth, but only in concert with financial discipline.

“Prudent monetary policy is not a sufficient condition for a stable, noninflationary financial climate,” he said, “Fiscal policy must also play a role.”

The Fed chairman, whose words are being closely monitored to determine monetary policy in the aftermath of the October stock market crash, said the central bank was doing its part to keep the economy on an even keel.

Maintaining Progress

“For the Federal Reserve, this means maintaining progress toward an environment of price stability in which the forces of economic growth can be fostered and sustained,” he said.

Greenspan acknowledged steps taken thus far by Congress and the White House to cut the budget deficits but said “the importance of credible deficit reduction cannot be overemphasized.”

“Financial markets around the world will continue to be subject to shocks so long as there has not been a reasonably complete resolution of these problems,” Greenspan said.

He said legislators should consider whether U.S. long-term interests would be best served “by a budget policy aimed at augmenting private savings through budget surpluses” so that the United States would not have to borrow so much abroad.