Economy Will Skirt Recession This Year, Greenspan Predicts

Despite fresh signs of a weakening economy, Federal Reserve Chairman Alan Greenspan told the Senate Banking, Housing and Urban Affairs Committee on Tuesday that he is still confident the economy can be brought in for a “soft landing” in the months ahead.

“The information we have to date is favorable,” Greenspan said. “I think we will make it.”

Greenspan confirmed that the Federal Reserve had eased its credit reins last week for the third time since early June. The Fed injected funds into the banking system to encourage a key interest rate to dip a quarter of a percentage point to 9%. The “federal funds” rate--the interest that banks charge each other on overnight loans--hit a peak of about 9.8% in late May.

Under the “soft landing” scenario that a number of Wall Street analysts believe is unfolding this year, the Fed’s 16-month credit tightening campaign, which lasted through May, should help curb rising inflation without plunging the nation into a recession.

But some analysts expect a downturn to begin later this year or early in 1990. They contend that the economy is on the verge of a “hard landing” that will sharply boost unemployment and make it impossible for the government to cut next year’s budget deficit substantially.

Adding to such fears were two reports issued Tuesday, one showing that construction spending fell by 0.8% in June and another showing that for the third straight month, an index calculated by the National Assn. of Purchasing Agents fell in July below the 50% threshold that signals whether industrial activity is growing or contracting.

Greenspan, however, reiterated the Fed’s consensus that the economy will skirt a recession during the next year, stating that central bankers are aiming at modest growth of about 2% to 2.5% this year, followed by an anemic 1.5% to 2% gain in 1990.

Greenspan, who had testified on monetary policy to a House subcommittee in July, said the Fed’s policy “is on the right track,” contending that the decision to begin pushing up interest rates last year has “succeeded in defusing inflationary pressures.”

But he noted that it is too early to tell whether the Fed’s recent “backing off” from its tight credit stance will achieve “an ideal configuration for the economy.”

Greenspan, who has repeatedly warned that the nation’s chief economic problem is its low savings rate, disclosed that the Fed has launched a study of possible policy initiatives to help encourage higher levels of U.S. savings and investment. The Bush Administration is working on similar studies, but Greenspan warned lawmakers not to expect easy solutions.

Opposes Funding Plan

With the Fed moving to lower interest rates over the past two months, most senators were less interested in challenging Greenspan on monetary policy than in soliciting his views on recent legislative controversies.

The Fed chairman repeated his opposition to funding provisions contained in the savings and loan bailout plan adopted by a House-Senate conference committee, which agreed last week to exempt the initial $50 billion in borrowing costs from the deficit ceiling imposed by the Gramm-Rudman budget law.

The financing scheme--also opposed by the Bush Administration on the grounds that it would open the door to future efforts to avoid Gramm-Rudman limits--is expected to be debated in the House and Senate this week.

Greenspan termed the $1 billion to $1.5 billion in extra up-front costs needed to generate the funds for the bailout through an alternative off-budget financing scheme a “very small insurance policy” that is worth paying to keep Gramm-Rudman intact.

Indeed, asked by Sen. Richard C. Shelby (D-Ala.) whether the S&L; bill threatened to turn Gramm-Rudman from a “steel band” into a “rubber band,” Greenspan replied: “I’m concerned it may be no band.”

Stories, Page 3