Fed Chairman Endorses Deficit Package : Economy: In a boost for the President, Greenspan hints that the $500-billion proposal could clear the way for lower interest rates.

Federal Reserve Chairman Alan Greenspan said today that he supports the $500-billion deficit-reduction package and hinted that it would clear the way for lower interest rates.

His endorsement gave President Bush a big boost in his efforts to sell the compromise proposal to a skeptical Congress.

Greenspan’s views were seen as crucial because supporters of the package are looking to the Federal Reserve to lower interest rates to offset any negative economic effects from cutting government spending and raising taxes.

Although Greenspan did not promise specifically that the Fed would lower interest rates, he noted that the reaction in financial markets has been favorable, and he indicated a belief that rates would decline if the plan is approved.

“The budget summit has crafted what appears to be a credible, enforceable reduction in the budget deficit stretching over a number of years,” Greenspan said in a statement he read at a congressional hearing.

“If enacted, the budget package should reduce the drain of the federal deficit on our national savings, lessen pressures in credit markets and enhance investment and the long-run growth potential of the United States,” he said.

Greenspan said that although the initial reaction of financial markets has been positive, the enthusiasm has been tempered by fears that the measure will not make it through Congress.

Addressing those concerns, Greenspan said, “Failure to enact the agreement would, in my estimation, be a grave mistake.

“If this agreement is voted down, prospects for coming to grips with the corrosive effects of budget deficits on our economy would be dim indeed,” he said.

“I am fearful that failure to enact the agreement would produce an adverse reaction in financial markets that could undercut our economy--already significantly weakened by the shock of the Middle East crisis and problems in our financial system,” Greenspan said.

The chairman of the Federal Reserve made his comments in response to a question posed by Rep. Doug Barnard Jr. (D-Ga.), chairman of a House Government Operations subcommittee.

Barnard was holding a hearing on changing the system that insures bank deposits. But he asked Greenspan at the start of the hearing whether he would like to comment on the budget summit.

Greenspan had come to the hearing with a prepared statement, which he read. He then answered a series of questions from Republicans on the subcommittee.

Many Republicans in the House have been the most outspoken in their criticism of the budget agreement, and the Bush Administration has been exerting major efforts to win their support.

Asked if he felt the agreement would help to push interest rates down, Greenspan replied, “Most certainly.”