Recovery Ready to Put on Speed, Greenspan Says

Federal Reserve Chairman Alan Greenspan predicted Tuesday that a still-hesitant economic recovery is about to gain momentum, although he acknowledged that the politically sensitive unemployment rate, now 7.8%, is unlikely to drop significantly before the November election.

His cautiously optimistic testimony before the Senate Banking, Housing and Urban Affairs Committee was greeted with unusually hostile criticism from Democrats and a leading Republican who noted, sometimes caustically, that his previously optimistic forecasts had proved inaccurate.

And although White House Press Secretary Marlin Fitzwater called the report “very encouraging,” its mixed forecasts could offer only scant comfort to President Bush, whose Democratic opponent, Arkansas Gov. Bill Clinton, has focused much of his campaign on the economy.

Some members of the panel went so far as to blame the Federal Reserve for failing to act aggressively enough to combat the nation’s economic problems and expressed skepticism that even cautious optimism is well-founded.

“Any stunted recovery we have is almost invisible, with increasing signs that we may slide back into a third phase of this recession,” argued committee Chairman Donald W. Riegle Jr.(D-Mich.).

Republican Sen. Alfonse M. D’Amato of New York--who is facing a tough reelection campaign--joined in the attack on Greenspan, terming his agency’s performance “abysmal” in countering the recession.

“For two years now you came up here singing the same song of recovery,” D’Amato said. “It shows you’re in an ivory tower. You don’t know what’s taking place on Main Street. . . . Your policies have exacerbated the problems we have today.”

Greenspan staunchly defended the Fed’s actions, however, noting that the central bank had acted 23 times in the last three years to reduce interest rates, most recently on July 2. Those steps, he said, should have been adequate to assure a robust rebound in growth and a decline in joblessness.

“Despite the cumulative size of these steps, the economic recovery to date nonetheless has been very hesitant,” he acknowledged. “Clearly, the structural imbalances in the economy have proven more severe and more enduring than many had previously thought.”

He gave no hint whether the central bank would reduce rates further this year.

But he rejected the notion that the nation would topple back into recession, saying the economy will strengthen as families and businesses reduce their debts and resume spending and investing.

“I expect that the economic expansion will soon gain momentum, which lower inflation should help to maintain,” the Fed chairman said. “Although the economy still is working its way through structural impediments to more vigorous activity, the advances that already have been made . . . augur well for the future.”

Greenspan’s appraisal came as the Federal Reserve Board presented its mid-year report on monetary policy to Congress. Along with his testimony, Greenspan released the Fed’s revised economic forecast, which boosted its estimate for unemployment in the last quarter of this year, saying that it could be as high as 7.5%.

Six months ago, it had predicted that unemployment would fall below 7% by the end of the year.

The Federal Reserve chairman conceded that the rise in unemployment over the last two months to an eight-year high of 7.8% had caught his agency by surprise. Asked whether the rate could climb above 8% before starting to go down, Greenspan said: “I certainly hope not.”

Greenspan said that an increase in growth to around 3% in 1993 should be enough to “reduce the unemployment rate noticeably over the next year and a half.” The Fed’s forecast showed the unemployment rate falling perhaps as low as 6.5% by the end of 1993.

The report presented a slightly brighter forecast for growth in the gross domestic product this year than it had in February, raising the estimate to about 2.5%. The earlier prediction was for growth of 1.75% to 2.5% this year. The Fed forecast also projected a gain of between 2.75% and 3% in 1993.

“In 1993, (economic) growth is expected to pick up slightly further from the 1992 pace, bringing additional small reductions in the unemployment rate,” the report said.

But Riegle, for one, remained unimpressed.

“The record shows that the Fed’s monetary moves have been too little--and too late--and despite the reassurances you have repeatedly given this committee, the economy remains wounded and struggling,” the Michigan lawmaker told the Fed chairman.

“The economy is mired in the worst period of stagnation since before the second world war,” added Sen. Jim Sasser (D-Tenn.).

Despite the senatorial prodding, however, Greenspan stuck by his view that the economy is on the brink of a slow but steady expansion. He rejected proposals for additional government action to spur growth.