Greenspan Says Fed Cuts Rates as Slump Eases


Federal Reserve Board Chairman Alan Greenspan acknowledged Wednesday that the Fed has sought to reduce interest rates further in recent days, despite growing signs from the central bank’s own economic data that the recession may be easing.

Greenspan took the rare step of publicly revealing current Fed policy at a hearing of the Joint Economic Committee in an apparent effort to assure Congress that the central bank is actively moving to deal with the recession.

The Fed chairman’s comments came as the central bank issued an optimistic new report on the nation’s economy, a roundup on regional conditions finding that there are growing signs that the economic decline is slowing.


And this upbeat report was bolstered by the separate release of February retail sales, which rose 0.8%, the Commerce Department said Wednesday. That marked the first time in four months that retail sales showed an increase, and the February figures were well above the 0.3% rise expected by analysts.

At the same time, the chairman of the Federal Home Loan Mortgage Corp. said Wednesday that the recession-hit housing market shows signs of recovery, and home sales could post a 4%increase this year as mortgage rates continue to drop.

“Housing affordability is at the highest level since 1977. We expect a gradual increase in home sales activity as a result and are looking for total home sales in 1991 to improve by 4% over last year,” said Leland Brendsel, chairman of the Federal Home Loan Mortgage Corp., known as Freddie Mac.

The agency is forecasting 1.1 million housing starts and 4 million home sales in 1991, compared to 1.19 million and 3.82 million last year.

The Fed’s March summary of economic conditions, compiled from reports from researchers in each of the system’s 12 district banks, said home builders and real estate agents are increasingly reporting that real estate markets across the country seem to be picking up, thanks both to lower interest rates on mortgages and sharp price cuts by desperate home sellers. Even the troubled New England economy shows new signs of stabilizing after a lengthy regional recession, the Fed’s Boston region reported.

And, while manufacturing remains sluggish nationally, especially in the auto industry, strong export sales are helping to offset the weakness in domestic sales and production.

Greenspan has been under pressure from Congress and the White House to lead the Fed to take more aggressive monetary policy steps to cut interest rates and help jump-start the economy.

That pressure has increased as it has become clear that Washington’s other economic tools--most notably tax and budget policies--are gridlocked by the massive federal deficit and can’t be used for short-term anti-recessionary cures.

Greenspan also finds himself in the hot seat partly because the Persian Gulf War is over, allowing more policy-makers in Washington to turn their attention to the economy.

As a result, Greenspan said Wednesday that with signs of inflation abating, the Fed believed that it could safely cut a key interest rate last Friday. In addition, Greenspan indicated that he believed that the continuing weakness in the banking industry called for lower rates to spur bankers to do more lending. Greenspan added that he views the troubles facing the banking industry and the credit crunch that has resulted as the biggest obstacle to a quick recovery.

So after it was reported early Friday that the February unemployment rate had jumped to 6.5%, Greenspan cut the benchmark federal funds rate by 1/4 percent. Although the Fed’s actions were widely reported last week, the fact that Greenspan was willing to break with Fed tradition by publicly acknowledging that the central bank had slashed interest rates so recently indicates his growing desire to placate Washington’s political leaders.

Yet Greenspan’s apparent willingness to appease the political Establishment runs the risk of making it difficult for the Fed to step back from its increasingly aggressive strategy when the recovery actually begins. In fact, Greenspan and other Fed officials acknowledge that the most difficult time for the central bank to set policy is at transition points in the economy, when the nation is on the verge of moving into or out of a slump. If, for instance, the Fed moves too far to cut interest rates just as the recovery gets under way, the actions could pump too much money into the pipeline, fueling higher inflation.

In fact, one of the most influential members of the Fed’s board of governors has just issued a clear warning about the direction of Fed policy now that the economy seems to be on the mend.

Wayne Angell, a Fed board member and one of the Fed’s leading anti-inflation “hawks,” said in a speech last week, “Monetary policy can do more harm than good by falling into a stop-go pattern that amplifies the rhythm of the business cycle.”