Greenspan Will Hold the Line on Interest Rates : Economy: The Fed chief says there are signs that a recovery has started, so he plans to continue current credit policy to fight inflation.

Federal Reserve Board Chairman Alan Greenspan said Tuesday that he sees “compelling signs” that a sustained recovery has begun and that the central bank has decided not to lower interest rates further.

Testifying to a House Banking, Finance and Urban Affairs subcommittee, Greenspan also said he does not believe that the economy will fall back into a slump later this year, as some analysts have predicted, even though the credit crunch is continuing. As a result, Greenspan said, Fed officials believe that they should continue their current cautious policies and not attempt to accelerate the recovery by cutting interest rates.

He said that, for the rest of the year, the Fed plans to stick with the same targets for the growth of the nation’s money supply--the central bank’s key instrument in controlling interest rates--to which it has adhered since last February.

Defending the Fed’s decision to stay the course, Greenspan stressed that he believes that the Fed’s policies in the long term will lead to a “solid economic recovery, with the unemployment rate moving down to its lowest sustainable long-term rate, with growth at or close to its maximum long-term sustainable pace, with inflation wholly under control.”

The Fed’s announcement that it plans to hold the line on interest rates comes just days after President Bush said he plans to reappoint Greenspan for a second, four-year term. As a result, the political pressure on Greenspan to pump up the economy has eased somewhat.

Throughout the recession, Greenspan has tried to follow a middle course, seeking to compromise somewhere between the Bush Administration’s demands for lower rates and the opposite demands of the anti-inflation hawks inside the Fed, who want the central bank to follow more stringent policies to reduce inflation.

Greenspan pushed the Fed to lower rates last fall and throughout the winter but began to back off further easing when the economy began to turn around this spring. His reluctance to cut rates prompted the Administration to make a show of its displeasure by delaying an announcement of Greenspan’s reappointment until the last minute--just weeks before his current term expires in August.

But Greenspan still faces criticism from Congress and some economists, who are pushing him to avoid a recessionary rerun.

In fact, some of the nation’s more pessimistic economists have warned that the crises in the savings and loan and banking industries could result in a severe shortage of commercial and industrial lending to businesses just as consumers are beginning to spend once more. Those economists believe that the current economic rally is so weak that such a credit crunch could drive the nation back into a slump by winter. They argue that the Fed should ease further to avoid a second recession.

Congress began to pick up on such criticism Tuesday. Rep. Richard Neal (D-Mass.) argued that Greenspan was premature in declaring the recession over.

“I just want to tell you firmly and emphatically this morning that is not the case in New England, or I certainly haven’t witnessed those indicators that I think that the layman might recognize as supporting the evidence that you’ve offered in your testimony,” Neal said. But Greenspan dismissed such concerns. “I must say I don’t see the elements of a double dip.”

He conceded, however, that the credit crunch is continuing and has led to a slump in some regions, most notably New England. Still, he stressed that the crunch is not serious enough to persuade the Fed to cut rates further.

Greenspan also warned Congress against reopening last fall’s budget agreement, despite the announcement Monday by the White House that the deficit will probably balloon once again in 1992 to a record $348.3 billion.