Greenspan Says Fed Will Act to Bar Recession

Federal Reserve Board Chairman Alan Greenspan sent a strong signal today that the central bank will act decisively to keep the country out of a recession by lowering interest rates once policy-makers agree on a deficit-reduction package.

In his strongest comments to date, Greenspan sought to reassure members of Congress that the Fed will do its part in any effort to significantly attack the huge federal budget deficit.

Many Republican critics of tax increases have charged that President Bush’s reversal on the tax question threatens to push the country into a recession by increasing the tax burden at a time when the economy is already growing at a sluggish rate.

However, Greenspan, delivering the Fed’s midyear economic report today, said “a major cut in the budget is unquestionably the right thing to do.”

While Greenspan said that the specific details of any Fed response to a deficit-reduction package would depend on the performance of the economy at the time, he left no doubt that the central bank would move to offset the adverse effects on growth from government spending cuts and tax increases by lowering interest rates.

“Major, substantive, credible cuts in the budget deficit would present the Federal Reserve with a situation that would call for a careful reconsideration of its policy,” Greenspan said. “I can only offer the assurance that the Federal Reserve will act, as it has in the past, to endeavor to keep the economic expansion on track.”

After keeping interest rates unchanged since December, the Fed took a modest step toward easing them on Friday. It supplied enough additional cash to the banking system to push a key interest rate, the federal funds rate, down from 8.25% to 8%.

Greenspan confirmed today that the Fed had eased slightly last week, saying the action was taken to offset the effects of banks becoming overly cautious in making loans.