Greenspan Defends Tight Money Policy : Says Taming Inflation Can Extend Economic Growth Beyond 1990

Federal Reserve Chairman Alan Greenspan, defending the Fed’s tight money policy at a congressional hearing on the thrift industry, said today that the central bank has kept the economy growing at a moderate pace that can be sustained.

Greenspan told the House Banking Subcommittee on Financial Institutions that the U.S. economy has yet to feel the full effect of higher interest rates. He said the Fed moved a year ago to tame inflation to keep the business expansion alive.

“The best way to stabilize the economy is to make sure disruptive inflationary pressures don’t take over,” Greenspan told the committee.

He said the rise in short-term interest rates engineered by the Fed, from 6.5% last March to nearly 10% today, was aimed at extending the current economic expansion, now in its seventh year, into 1990 and beyond.

“Our job is to suppress inflationary forces that would destabilize the economy,” Greenspan said. “To the extent that we can do that, we can prolong the recovery through this year and well beyond,” he said.

It was the Fed chairman’s first public comments on inflation since Friday’s 1% jump in wholesale prices for February and Tuesday’s more moderate 0.4% rise in consumer prices.

Greenspan said the Fed is aware that an unchecked rise in interest rates would increase the cost of resolving the savings and loan crisis, estimated by the Bush Administration at $157 billion over the next 10 years.

But he said the Fed is concerned that the ultimate cost to the thrift industry and to the taxpayer would mount if it allowed inflation to get out of control.

Fed officials contend that the current thrift crisis was caused when interest rates had to be jacked up in the early 1980s to combat inflation. That put thrifts in the position of paying more for deposits than they were receiving on fixed-rate mortgages.

The Bush Administration is worried that the Fed, in its eagerness to curb inflation, might tip the economy into recession, making it harder than ever to reduce the federal budget deficit.

Bush said Tuesday he would be unhappy if interest rate increases dampened economic growth and, although denying any policy differences with the Fed, seemed to be signaling Greenspan not to press too hard on the monetary brakes.

“I don’t want to see any actions taken that are going to kill off the growth in our economy,” Bush told reporters.

Greenspan said he is aware of the consequences to the economy and said the thrust of Fed policy, by acting promptly to nip inflation in the bud, is to make certain that over the long run interest rates are as low as possible.