Federal Reserve Board Chairman Alan Greenspan sought Tuesday to reassure jittery Wall Street investors that the central bank has not abandoned its fight against inflation, despite its decision to ease credit briefly the week before last.
Greenspan's remarks before a House Banking, Finance and Urban Affairs subcommittee came after the Dow Jones industrial average plunged 54 points Monday in response to testimony by the Fed chairman last week that left some analysts worried that the Fed was bowing to political pressure to lower interest rates.
The chairman's efforts on Tuesday were only partly successful. Stocks bounced back, with the Dow finishing up 17.82 points to 2,922.52. But the gain only partly offset Monday's decline.
In his testimony last week, Greenspan said the Fed stood ready to cut interest rates once Congress and the Administration agreed on a credible $50-billion to $60-billion deficit-reduction package--provided that such action is needed to prevent a recession.
The remarks sparked an adverse reaction because many top financial analysts believe that inflation still is a serious threat. Greenspan has been under pressure from the White House to nudge interest rates down further.
But on Tuesday, the Fed chairman said the latest reports on inflation had added a "note of caution" to the central bank's view of the economy. And he asserted that the board remained intent on reducing the inflation rate to near-zero "within a few years."
He also sought to reassure the markets that the Fed would not rush to endorse any new deficit-reduction agreement between the White House and Congress unless the pact is seen as "credible and enforceable" in the financial markets.
And he reiterated that completion of a really effective deficit-reduction agreement probably would spark an interest-rate decline on its own, without any inducement from the nation's central bank.
As he has in earlier testimony, Greenspan said Tuesday that a decision to ease credit slightly the week before last should not be viewed as a change from the Fed's overall anti-inflation stance.
"If we don't fritter away the benefits of the last 2 1/2 to three years--and I can assure you we don't intend to do that--then I see no reason to expect other than the achievement of general price stability over the next several years," he said.
At the same time, Greenspan told the Banking subcommittee that the nation's banking system should emerge stronger from the current credit squeeze that is helping to rein in the excessive borrowing of the late 1980s.
In his testimony before the panel, he cited tighter credit standards and higher capital requirements as helping to reduce worries about the banks--despite current complaints that the tighter standards are inducing an unwanted "credit crunch."
But Greenspan stopped short of giving the industry a clean bill of health.
The Fed chairman's comments came in response to a series of questions by Rep. Stephen Neal (D-N.C.), who is sponsoring legislation to require the Fed to pursue a goal of achieving a zero inflation rate.
Neal said he believes Monday's steep drop in the stock market was caused by general worries that the Fed was wavering in its inflation battle.
Greenspan asserted Tuesday that the central bank is not retreating from its earlier support of Neal's legislation. And he argued that the Fed has been clamping down on the amount of money it provides to the nation's banking system.
The Fed's goal is to provide enough money to the banking system to keep the economy growing while guarding against supplying so much that it renews inflation. The nation's money supply over the last three years has grown at the slowest rate since the 1950s.
Greenspan testified that the recent report showing that consumer prices jumped 0.5% in June had added a "note of caution" to the inflation outlook. He said any continuation of that increase in coming months would clearly be "very troubling."
At the same time, Greenspan said, the June increase and other bad inflation figures reflected past developments and did not show recent gains that the Fed has made by slowing the growth of the money supply.