Inflation Not a Threat Now, Greenspan Reports : Fed Chief Declares That He’ll Move Quickly to Avoid Recession

Federal Reserve Chairman Alan Greenspan, providing reassurance to the Bush Administration that he would move quickly to avoid an “unnecessary and destructive recession,” said Thursday that higher inflation is no longer an immediate threat to the economy.

Greenspan’s official midyear report to Congress on monetary policy marked a sharp turnaround from his statements only six months ago, when he warned that the risk of higher inflation clearly outweighed the danger of recession.

But the Fed chairman, testifying before a subcommittee of the House Banking Committee, hinted that the central bank would not encourage a significant further drop in interest rates unless the economy slips badly from its current slow-growth path.

“We tend to be cautious, and rightfully so,” Greenspan said in response to a question on whether the recent decline in interest rates was the start of a long-term trend.

Greenspan’s caution was understandable. In his two-year tenure as Fed chairman, Greenspan has been forced twice to reverse direction shortly after making monetary policy moves, and he clearly wants to avoid such a turn of events again.

Shortly after Greenspan took office in August, 1987, the Fed took the highly visible step of increasing its discount rate on overnight loans to member banks. But that later backfired when Greenspan was forced to ease credit after the stock market crash in October, 1987, a widely praised move to prevent the financial shock from spreading throughout the economy.

The Fed engineered a further dip in interest rates in early 1988. But it was forced to switch gears again in response to unexpectedly strong growth and put the economy on a steady diet of rising interest rates in April, 1988. That regimen ended only last month.

“Greenspan doesn’t want to be whipsawed again,” said Jerry Jordan, chief economist at First Interstate Bank in Los Angeles. “The tone of Fed policy has shifted toward ease, but I expect Greenspan to proceed in a slow, plodding manner.”

Greenspan officially confirmed that the Fed, after pushing up interest rates for more than a year, has eased its grip on credit twice over the past two months. He made it clear that the Fed hopes to avoid having to return to credit tightening soon.

“Looking ahead at the remainder of 1989 and into 1990, recent developments suggest that the balance of risks may have shifted somewhat away from greater inflation,” Greenspan told the lawmakers, adding later: “It is not desirable to do too many wiggles.”

In contrast to its earlier efforts to drive up interest rates--aimed at quelling inflation by taking the steam out of a potentially overheated economy--the goal of Fed policy now has switched, Greenspan said, “to support moderate growth of demand in the near term, while . . . progressing toward our longer-run goal of a stable price level.”

Wall Street was initially cheered by Greenspan’s remarks, which emphasized the Fed’s intention to accomplish a difficult “soft-landing” in which the economy continues to grow at a moderate pace while inflation is kept in check.

But the Dow Jones industrial average, after rising above 2,600 for the first time since before the stock market crash of 1987, turned down in late trading, ending the day off 8.92 points at 2,575.49. The dollar fell slightly on expectations of lower interest rates, while bond prices moved up as well.

A Good Path

Greenspan, while acknowledging that a policy mistake by the Fed could become “the trigger for a downturn,” was generally upbeat in answering questions from lawmakers.

“The path we are on is probably as good a path as we could be on,” he said in response to a question from Rep. Doug Barnard Jr. (D-Ga.).

Elsewhere on Capitol Hill, a senior Bush Administration official offered Greenspan a firm pat on the back for his success so far in keeping the economy on a steady course.

Michael J. Boskin, the White House’s chief economist, told the Joint Economic Committee that the central bank has acted prudently and avoided “any major policy mistakes.”

But when asked whether the Fed should lower interest rates further to help ward off a recession, Boskin clammed up. “I don’t like to preach to the Fed in public,” he said.

Earlier this year, though, both President Bush and Treasury Secretary Nicholas F. Brady publicly warned that the Fed was risking a recession by keeping interest rates too high.

Indeed, the White House and the Fed, after getting off to a rocky start at the beginning of the Bush Administration, seemed to be going out of their way to kiss-and-make-up in public.

Pointing out that he talks frequently, sometimes as often as “several times a day” with key Administration officials, Greenspan said there is “only one American government, only one economic policy.”

Fed officials expect economic growth to average between 2% and 2.5% this year, slowing to 1.5% to 2% in 1990. Inflation, which had run at an annual rate of more than 6% through May, is expected to ease as well, averaging 5% to 5.5% for the year as a whole and coming down to 4.5% to 5% next year.

Savings and Loan Rescue

On another matter, Greenspan declined to comment on a proposed compromise for the financing of the savings and loan rescue package. The House and Senate have passed different versions of the bailout legislation and are negotiating in a conference committee in an effort to resolve the differences.

The Senate and the Bush Administration want to raise $50 billion through the sale of bonds by a new agency, keeping the cost of the bailout off the federal budget. The House wants to use Treasury bonds--on the budget--and to waive the limits on deficit spending under federal law.

Rep. Chalmers Wylie (R-Ohio), the ranking Republican on the House Banking Committee, proposed Thursday using the Administration plan for the first $25 billion, then placing the next $25 billion on-budget. But a Treasury spokesman said the Administration still opposes any plan that would waive the deficit spending limits.

Times staff writer Robert A. Rosenblatt contributed to this story.