Greenspan Supports Zero Inflation Bill : Economy: The Federal Reserve chairman calls the five-year plan ‘a constructive effort.’

Federal Reserve Board Chairman Alan Greenspan today said he supports a bill to achieve zero inflation over a five-year period.

“The zero inflation resolution represents a constructive effort to provide congressional guidance to (the) Federal Reserve,” Greenspan said in testimony to the House Banking Subcommittee on domestic monetary policy.

Greenspan said he believes that inflation could be brought down closer to zero from the level now of about 4.5%, without pushing the economy into recession.

There would be “some modest loss of economic output,” Greenspan said, but he stressed that the long-term rewards of stable prices are far greater than any short-term losses.

“At the moment, after seven years of inflation trending around a 4% annual rate, individuals, businesses and financial markets appear to believe with some conviction that inflation is likely to remain in this vicinity.

“Of course, over the years, monetary policy will be bringing inflation down further, and inflation expectations will adjust downward as well, but the mere passage of legislation such as this could be helpful in reducing those expectations even more quickly,” Greenspan said.

The degree to which the Fed would have to raise interest rates to achieve price stability would be much less if the government would reduce its budget deficit, he added.

Greenspan also said he opposes legislation that would require greater public disclosure of Fed actions. He also defended the independence of the Federal Reserve.

“This independence enables the central bank to resist short-term inflationary biases that might be inherent in some aspects of the political process,” he said.

The Fed sometimes must take actions that are unpopular in the short run but are in the best interest of the country in the long run, he added.

“The standard of living of the American people will be higher over time if we pursue monetary policies that are consistent with long-term price stability,” he said.

Greenspan said he did not favor legislation introduced by Democratic Reps. Lee H. Hamilton of Indiana and Byron L. Dorgan of North Dakota that would require top economic officials of the Administration to meet formally with the policy-making Federal Open Market Committee three times a year.

He said Fed policy makers maintain a close working relationship with the secretary of the Treasury and other Administration officials and that he would be willing to expand those contacts if the individuals involved believe that it would be useful.

“The ability of the Federal Reserve to conduct monetary policy as it does today--with relative freedom from day-to-day pressures from the Administration as provided by Congress itself--has served the nation well over the years and should be retained,” Greenspan said.