No Interest Rates Cuts Soon, Greenspan Says : Economy: Fed chief cites inflationary impact of oil price hikes. He doubts the nation is in a recession--yet.

Federal Reserve Board Chairman Alan Greenspan dashed hopes Wednesday for any immediate reduction in interest rates, telling lawmakers that the inflationary impact of recent oil-price increases impedes the central bank in taking steps to stimulate the flagging economy.

Greenspan said that he does not believe the nation is in a recession, “at least as yet,” but he admitted that inflation is likely to worsen and economic growth to slow in the months ahead because “events in the Middle East have introduced new and substantial risks to the outlook.”

If crude oil prices average about $30 a barrel over the next year, Greenspan said, the economy will suffer a blow that could cut the rate of economic growth by as much as a full percentage point and push inflation as much as 2 percentage points higher.

Greenspan emphasized both the Fed’s determination to keep inflation under control and its inability to protect Americans from harder times.

“The chance of a significant break soon in the inflation trend would seem to have diminished in view of the additional pressures from oil prices,” Greenspan said in testimony before the Joint Economic Committee of Congress.

Moreover, the Fed chairman added: “There is no policy initiative that can in the end prevent the transfer of wealth--and cut in our standard of living--that stems from higher prices for imported oil.”

However, in repeating earlier pledges, Greenspan held out the possibility that the Fed would ease credit and lower rates if Congress and the White House reach agreement on a plan to slash about $500 billion from the federal deficit over the next five years.

Cutting short-term interest rates in the absence of a budget pact, Greenspan said, could boomerang on the Fed, producing a damaging increase in long-term rates if financial markets decide that central bankers are weakening in their resolve to fight inflation.

“Policy actions that are not perceived to be consistent with a stable, non-inflationary economic environment could easily be counterproductive over the long haul,” he said.

Both stock and bond markets retreated in response to Greenspan’s testimony, but the U.S. dollar rebounded strongly against foreign currencies.

The greenback has been losing ground in recent weeks as higher interest rates in other countries lured international capital that previously had flowed to the United States. The Fed, in keeping U.S. interest rates up, bolsters the dollar by making investments here more attractive and by easing investor fears that inflation will go unchecked.

But the tough anti-inflation stance also puts the Fed on a collision course with some top Bush Administration officials, particularly Treasury Secretary Nicholas F. Brady, who has repeatedly urged Greenspan to pump more money into the economy to help avert a possible recession.

“The Fed is in a real bind,” said Bruce Steinberg, an economist with Merrill Lynch in New York. “It would like to ease because the economy is rapidly weakening, but, at the same time, inflation is rapidly accelerating.”

Higher unemployment and other signs of sluggish growth normally would lead the central bank to cut interest rates. But, inflation was reviving before the Persian Gulf crisis caused oil prices to soar, and the Fed is afraid to ease credit when consumer prices are going up at the fastest rate in almost nine years.

Meanwhile, further evidence that the economy is slowing to a crawl emerged from the Fed’s regular survey of its regional districts and from a Commerce Department report that said housing starts fell for the seventh month in a row, hitting the lowest level since near the bottom of the last recession in 1982.

August’s housing starts, calculated at a seasonally adjusted annual rate, slipped 1.7% to 1.13 million units after falling 3.5% in July and 1.4% in June. And new building permits, a leading indicator of future construction activity, dipped 4.3% in August.

The Fed survey indicated that economic activity is slowing in most of its 12 regions, with much of the East Coast clearly in a slump.

“Weakness is most apparent in the Northeastern and mid-Atlantic districts,” the report said. About the only modestly bright spots in the economy, the report indicated, are in the upper Midwest around Minneapolis and on the West Coast.

When asked about the regional disparities during his testimony, Greenspan said New England and the Eastern Seaboard are in the worst shape, but, “as we move from east to west, things improve.”

Greenspan acknowledged that the odds of a recession are now higher because of the gulf crisis. But “whether or not it’s greater than 50-50,” Greenspan added, in one of his many deliberately vague pronouncements of the day, “I think it’s actually too soon to say.”

The Fed chairman also endorsed the Administration’s plan to cut capital gains taxes, arguing that it would help revive depressed real estate values.