Fed May Cut Funds Rate to Lessen Credit Crunch : Economy: Chairman Alan Greenspan told senators he’s concerned that tight lending is worsening the recession.
Federal Reserve Board Chairman Alan Greenspan, fearful that the continuing credit crunch is worsening the recession, said Wednesday that the central bank is preparing to move quickly--possibly by reducing a key interest rate--to help ease the pinch.
In testimony before the Senate Banking Committee, the Fed chairman said the central bank will likely move to reduce the federal funds rate--the interest rate banks pay for overnight loans--and also may use “other strategies” to confront the credit crunch. Moreover, Greenspan said, the bank is likely to move quickly--possibly in the next few days. “We’re pressing the issue,” he told lawmakers. “Time’s not on our side.”
Greenspan’s assessment of the economic situation appeared to be decidedly more pessimistic than his remarks of a day earlier, when he expressed growing optimism that the worst of the recession might be over.
At that time, Greenspan said he thought that the Fed’s moves so far--the central bank has pushed interest rates down six times since the Gulf Crisis began Aug. 2--had been adequate.
On Wednesday, however, he offered a gloomier picture of the economic situation, saying that the Fed is increasingly worried about the “disinclination of commercial bankers to lend to otherwise credit-worthy customers.”
Greenspan’s remarks came amid a series of other adverse economic developments:
* Treasury Secretary Nicholas F. Brady told lawmakers that the Administration will need another $30 billion this year to carry out the bailout of insolvent savings-and-loan associations, eventually pushing the total cost of the rescue beyond $130 billion.
* The nonpartisan Congressional Budget Office declared that the economy is formally in a recession, setting the stage for a new debate in Congress over whether to suspend last autumn’s five-year deficit-reduction accord in order to help jump-start the economy.
* Comptroller General Charles A. Bowsher predicted that a six-month war against Iraq would add at least $50 billion to the federal budget deficit, which he said already is surging well beyond $300 billion and may reach $400 billion this year.
“I think we are digging ourselves a huge financial hole at the federal level,” Bowsher said.
Greenspan’s new, more pessimistic outlook was bolstered by the publication of the Fed’s “beige book,” a compilation of reports on the economic situation in individual regions of the United States, which showed economic output shrinking in most areas of the country.
During his testimony Wednesday, Greenspan told the panel that the Fed is fearful that economic recovery will be stalled if nervous bankers are unable to provide financing for credit-worthy corporations and consumers.
Although the central bank has made repeated efforts to lower interest rates in recent months, the nation’s money supply is growing sluggishly because banks remain hesitant to make new loans.
Greenspan cautioned that the nation’s weaker banks “may well have lost a significant amount of their business” as they restrained lending to rebuild their capital position.
Apparently frustrated by the banking system’s unwillingness to move more aggressively, Greenspan took the unusual step of signaling that he is about to ease rates further.
“We may have to take additional action,” Greenspan said. “If the money supply is not on track, one way is to bring federal funds (rate) down,” the Fed chairman said.
The $30 billion that Brady asked Congress to approve for the S&L; bailout is only to cover this year’s losses from shutdowns of insolvent S&Ls.; It does not include the borrowing costs that will result from federal financing of the closing of hundreds of defunct thrifts.
Brady also asked the panel for permanent authority to spend money on the financial cleanup without returning to Congress each time, but congressional strategists said the legislators are unlikely to grant that request.
The declaration by CBO that a recession is under way automatically opens consideration of whether to suspend last autumn’s budget deficit-reduction accord, but it doesn’t necessarily mean the pact will be scrapped entirely.
Under the terms of the fall agreement, whenever CBO forecasts two consecutive quarterly declines in the nation’s output--technically the definition of a recession--the senate majority leader must introduce a resolution calling for suspension of the cost-cutting provisions.
But the House leadership is not required to introduce such legislation, and the Administration is against opening up the budget pact. As a result, congressional strategists say it’s unlikely the accord will be undone.
Even without the suspension, however, the actual deficit will already soar far above official estimates because the costs of both the Persian Gulf War and the savings and loan crisis are not included in the formal budget calculations.
If the entire budget-cutting accord were to be suspended, all restrictions on federal spending imposed by last fall’s agreement would be eliminated, which could dramatically increase the size of the deficit.
The slowdown in the economy is expected to bring about greater spending for unemployment, welfare and other benefits for laid-off workers.
Yet, both the congressional leadership and the White House say they remain committed to the budget agreement in order to curb the deficit and are opposed to suspending the accord.
Separately, Senate Majority Leader George Mitchell (D-Me.) told reporters Wednesday that Congress will not consider enacting new taxes to help finance the war in the gulf unless the President proposes one, which the White House insists is unlikely.
“What is the purpose of speculating on how to pay for the cost when we don’t know what the cost is?” Mitchell asked.
