Fed Chief Says Economy Still Is Worsening

Despite recent suggestions that the recession may be about to end, Federal Reserve Board Chairman Alan Greenspan said Tuesday that he believes the economic situation still is worsening. But he rejected demands that the Fed lower interest rates.

“Week by week, day by day, the numbers still indicate there is a modest decline,” the Fed chairman said in pessimistic testimony before a hearing of the Senate Banking, Housing and Urban Affairs Committee.

At the same time, Greenspan also brushed aside exhortations from some panel members that the Fed nudge interest rates still lower to spur an economic recovery. He warned that moving now to do so could threaten to exacerbate inflation in the future.

The Dow Jones industrial average, which had risen 18 points early in the day on perceptions that the economy was on the mend, closed up only 2.73 points at 2,930.45. The market rally apparently faded in response to the Fed chairman’s remarks.

The Commerce Department, meantime, reported that new orders for durable goods plunged 6.2% in March, a sign of serious weakness in the manufacturing sector. The decline, the third in as many months, was the steepest since an 11.2% drop last November.

Greenspan’s remarks were not all bearish. The Fed chairman agreed with many analysts that despite the continuing deterioration in the economy, “we do expect the bottom to occur within a reasonably short period of time.”

But he declined to offer any prediction on how quickly an upturn might come. At best, he said, “the evidence at this stage (is that) the economy is still modestly moving lower, but at a diminishing rate.”

Greenspan’s remarks drew calls from key senators for quick action in reducing interest rates. “We still have a prime rate that’s very high,” Sen. Donald W. Riegle Jr. (D-Mich.), the panel’s chairman, remarked. “We still have an economy that’s going down.”

But the Fed chairman warned that, when the central bank tries to ease money and credit policy too rapidly, there is a danger that “we overdo it” and stimulate inflation. “Once you do that, it is very difficult to rein it in,” he said.

As expected, Greenspan joined other top federal regulators in generally endorsing the Bush Administration’s sweeping new bank overhaul plan, which would provide broad new powers to commercial banks to enable them to compete with other financial institutions.

But he strongly opposed a portion of the plan that calls on the Fed to lend $25 billion to help bolster the Federal Deposit Insurance Corp., which protects holders of savings accounts in case a bank becomes insolvent.

Although the fund is dwindling rapidly under the pressure of more than 1,200 bank failures over the last five years, Greenspan said that allowing it to borrow from the Fed would set a bad precedent, encouraging other troubled agencies to turn to the Fed for loans.

“It doesn’t strike us as sound economic policy,” he said. “I most certainly think it should not be done.”

The Treasury had sought to have the central bank provide the money partly as a way to avoid enlarging the burgeoning federal budget deficit. The Fed has billions of dollars in reserve.

But top Administration officials insisted that they generally were encouraged by the chairman’s overall endorsement of the banking-reform plan. Comptroller of the Currency Robert Clarke and FDIC Chairman L. William Seidman also supported the plan at Tuesday’s hearing.

The issues will be important because over the next several weeks, Congress will be debating whether to grant the expansive new powers sought by the Administration or merely limit its work to rescuing the deposit insurance fund and making other regulatory changes.

The prospects are better for a wide-ranging bill in the Senate, which voted two years ago to give banks new powers.

The House, however, is likely to take a more restricted view. House Banking, Finance and Urban Affairs Chairman Henry B. Gonzalez (D-Tex.) said Tuesday that he hopes to send to the House floor a “limited” bill before Congress’ Memorial Day recess.

“The consensus seems to be for funding to ensure that the bank insurance fund remains solvent and that the regulators have the necessary money to deal with failing banks in a proper manner,” Gonzalez said.

“We are simply dealing with the realities of a rapidly declining balance in the bank insurance fund and the need to maintain confidence,” he said. “We cannot play a dangerous game of Russian roulette by allowing the fund to hit zero before Congress acts.”