Fed Is Willing to Cut Rates Again : Economy: Greenspan tells Congress U.S. is poised for a spring recovery. He says he would make interest reductions as ‘insurance’ against lingering recession.

Federal Reserve Board Chairman Alan Greenspan said Tuesday that he believes the economy is poised for recovery beginning in the spring, but he assured Congress that the Fed stands ready to cut interest rates further if that is necessary to provide “additional insurance” against a lingering recession.

Economists interpreted Greenspan’s carefully hedged remarks in congressional testimony as a signal that the Fed does not believe it needs to cut rates immediately but will move quickly in response to any fresh sign of significant economic weakness. Some believe that could occur as early as Friday if the January unemployment figures, due out that morning, appear particularly bad.

“We expect that the amount of monetary ease in the pipeline is adequate to turn the economy onto the path of sustained recovery,” Greenspan told members of the House Budget Committee, referring to a series of recent interest-rate cuts orchestrated by the Federal Reserve.

He said that those rate cuts should help stimulate a recovery beginning in the second quarter and gaining momentum later in the year. “But assessing the economic outlook at the present time is extraordinarily difficult,” he said. “We are, of course, continuing to evaluate whether some additional insurance in the way of further monetary ease would be appropriate.”

The Federal Reserve’s key policy-making committee met behind closed doors later in the day to determine monetary and interest-rate policy for coming months--decisions that are never announced.

Greenspan’s cautiousness in his testimony reflects the difficult balance he must achieve in setting monetary policy in the midst of an economic slump that has become the overriding issue in the presidential election.

On the one hand, the Administration views the Fed’s ability to stimulate the economy through interest-rate cuts as the government’s most potent anti-recession strategy. At the same time, Greenspan is seeking to assure jittery financial markets that his agency will not abandon its long-term campaign to tame inflation by controlling the growth of the money supply.

“He was talking out of both sides of his mouth,” observed Allan Meltzer, a leading economist at Carnegie Mellon University. “The Fed hates election years.”

Wall Street was clearly cheered by Greenspan’s remarks. The Dow Jones industrial average rose 38.69 to a record high of 3,272.81 as traders responded favorably to the prospect of additional rate cuts as well as reports of rising automobile sales.

In his comments to lawmakers, Greenspan telegraphed a direct warning that the Fed might hold off on further interest rate cuts if Congress and the White House embark on a tax-cut bidding war that could significantly increase the federal deficit.

“Above all, I urge you to adhere to a budgetary strategy . . . that is geared to the longer-run needs of the U.S. economy,” Greenspan said. “Maintaining a commitment to the elimination of the budget deficit . . . will help enormously.”

The Fed has not cut rates since late December, when it slashed the benchmark discount rate by a full percentage point to 3.5%. The dramatic move reduced the rate--the interest charged on overnight loans to commercial banks--to its lowest level since 1964.

In the absence of further action by the Fed, long-term interest rates on mortgages and other loans have begun to creep back up. In part, the rise reflects fears in the financial markets that Washington is about to abandon efforts to reduce the deficit to boost the economy.

Indeed, many economists have questioned the wisdom of the package of tax cuts proposed by President Bush in an effort to combat the longest recessionary slump since World War II. The Bush economic plan includes a proposed $500 increase in the personal exemption for dependent children and a reduction in the maximum tax rate on capital gains.

Critics contend that the White House package will do little to help average Americans or stimulate the economy, but will worsen a federal deficit projected to reach a record $399 billion this year.

Senior Administration officials defended the Bush plan on Capitol Hill, insisting that it would stimulate the economy without violating the pay-as-you-go rules of the 1990 budget agreement between the White House and Congress.

Bush, speaking to grocers in Florida as part of a continuing effort to sell his plan to the public, argued that it provides the right formula for ending the recession. “Our economy has slowed down,” he said. “We must get it fired up again.”

Congressional Democrats countered that the White House had skewed its package to favor the rich and had resorted to budget gimmickry.

The Joint Committee on Taxation, a research arm of Congress, released a new analysis disputing Bush’s claim that his capital gains tax cut would not increase the deficit. The panel projected that the capital gains measure would cost the federal government $15.4 billion over the next five years. Altogether, the President’s proposed tax reductions would result in a combined loss of $50.2 billion in revenues over the same period, the committee said.

Under election-year pressure to win rapid congressional approval of his package, Bush and his senior advisers have signaled their willingness to consider amending the 1990 budget agreement so that funds can be shifted from the defense budget to pay for the proposed tax cuts.

So far, Bush has publicly rejected calls for a fund transfer between the defense and domestic sectors. But in his introduction to the 1993 budget, White House Budget Director Richard G. Darman said the Administration would agree to that trade-off if more controversial financing proposals--including cuts in Medicare and other entitlements for affluent Americans--are rejected by Congress.

Many leading congressional Democrats seem to take it for granted that Bush will wind up agreeing to use the “peace dividend” produced by declining defense spending to finance the tax cuts he is seeking.

The President’s critics argue that the methods proposed in the White House budget for financing the tax reductions amount to little more than accounting gimmicks that will be quickly dismissed by Congress. In fact, House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.) quickly rejected Bush’s proposal to cut Medicare benefits to help pay for tax reductions, saying neither Democrats nor Republicans would go along with the idea.

House Majority Leader Richard A. Gephardt (D-Mo.) assailed the President’s tax and budget proposals in remarks on the House floor. “The program doesn’t measure up,” Gephardt said. “It has a record-breaking $400-billion deficit, a menu of special-interest tax gimmicks. . . . The President asked us to revive Reaganomics.”

MORE JOBLESS BENEFITS: Congress passes a 13-week extension of payments. A16