Greenspan Says Fed May Lower Interest : Tells Senate Panel of Possible Need to Ease Credit Crunch

Federal Reserve Board Chairman Alan Greenspan strongly suggested today that the central bank is preparing to nudge interest rates lower to offset emerging signs of a credit crunch.

Greenspan told the Senate Banking Committee that slow growth in the money supply and an increase in average interest rates on commercial loans indicate credit conditions may be tightening independent of central bank action.

“If that is in fact the case, it could have undesirable effects on the economy that the Federal Reserve would have to consider offsetting using monetary policy,” he said.

That would mean “a very modest change in the level of the federal funds rate,” the key rate banks charge among themselves for overnight loans, he said.

The Fed raises interest rates to combat inflation by slowing the economy and it lowers rates in an effort to pep up growth if the economy appears to be heading toward a recession.

Its policy has remained unchanged since late December, with the federal funds rate averaging around 8 1/4%. Despite that, Greenspan said commercial loan rates now appear to be edging higher in the absence of Fed action. He said the central bank is not considering tightening credit desirable at this point.

The central bank chief’s comments marked a sharp reversal from testimony only three weeks ago to the same panel. He said then that little evidence had emerged yet of a broad-based credit crunch affecting the economy nationally.

However, he said today: “Accumulating evidence to date indicates commercial bank loan rates and collateral requirements are firming in the context of an unchanged federal funds rate. This suggests a market tightening of modest dimensions.”

Business owners and bank executives have been saying for months that tighter lending standards in response to the savings and loan crisis, a softer economy and weakening real estate markets are making it harder for businesses to get loans.

At an extraordinary meeting two months ago with bankers in Washington, Greenspan teamed with other top federal bank regulators to urge that banks continue to make sound loans.

“The effect of commercial banks pulling back is something not dissimilar to what happens when the Federal Reserve tightens. And what we’re able to do under those conditions, I would say, is to essentially offset any structural tightening that may occur by . . . using monetary policy,” Greenspan told the Senate committee.

“We are monitoring the situation on a day-by-day basis,” he said.