Fed May Fall Short in Recession Fight : Lowering Interest Rates Might Not Work--Greenspan

Federal Reserve Chairman Alan Greenspan said today the central bank has been pushing down interest rates in an effort to keep the country out of a recession and acknowledged the Fed’s best efforts might not be enough.

After a year of raising interest rates to dampen inflationary pressures, Greenspan said, the Fed switched course in June and began lowering rates because of widespread signs of a weakening economy.

Greenspan’s remarks were the first official indication that the central bank had indeed reversed its yearlong tightening efforts, although there was a widespread belief in financial markets that this was occurring.

Greenspan, making his midyear report to Congress, indicated that the Fed stood ready to lower rates further, but he said its best efforts might not be enough to stave off an economic downturn.

“Some day, some event will end the extraordinary string of economic advances that has prevailed since late 1982,” Greenspan said in testimony before a House banking subcommittee.

Mistake Possible

The Fed chairman said it was entirely possible that some Federal Reserve policy mistake could trigger a new recession despite the agency’s best efforts to keep the current record peacetime recovery going.

Elsewhere on Capitol Hill, the Bush Administration praised the Fed’s efforts to drive down interest rates.

Michael Boskin, the President’s chief economic adviser, told the Joint Economic Committee that the central bank had acted prudently and had avoided “any major policy mistakes.”

He declined to say whether it should lower interest rates further to avoid a recession, saying, “I don’t like to preach to the Fed in public.”

Greenspan said the Fed must weigh the dangers of a recession against the risk that too loose a monetary policy could spark a new inflationary spiral in the country.

Greenspan said the Fed’s policies will be geared to avoid “an unnecessary and destructive recession.”

The Fed chairman’s comments indicated that the central bank was likely to continue its policy of gradually lowering interest rates over the coming months. Greenspan said the Fed first began easing credit conditions in early June and eased again in early July.

Greenspan released a revised economic forecast which showed that the central bank still hopes to achieve a so-called soft landing in which growth will slow enough to cool inflationary pressures but not decline so much that the country is thrown into a recession.

The Fed predicted that the overall economy would grow at an annual rate of between 2% and 2.5%. This was lower than the Administration’s revised forecast on Tuesday that the economy would grow at a 2.7% rate this year.

The Fed saw more dangers from higher inflation, forecasting that consumer prices would rise by between 5% and 5.5% this year, up from last year’s 4.4% increase.

The Administration is less concerned about an upturn in inflation, forecasting that consumer prices would rise 4.9% this year.

Monetary Targets Unchanged

In setting preliminary monetary growth targets, Greenspan said the Fed had decided to leave the growth rates unchanged for this year and next year as well.

For M-2, the measure of the money supply which includes currency in circulation and interest-bearing checking accounts, the Fed said it would aim for an increase of between 3% and 7% both this year and in 1990.