Greenspan Defends Fed Interest Rate Hikes : Policy: Central bank chairman tells a skeptical Senate panel the moves were necessary to reduce the threat of inflation.

Federal Reserve Board Chairman Alan Greenspan on Friday mounted his first public defense of the Fed’s interest rate increases this year, telling a skeptical Congress that the central bank had no alternative but to hike rates to reduce the threat of inflation.

Confronted with stiff criticism from leading Democratic lawmakers, Greenspan told the Senate Banking, Housing and Urban Affairs Committee that market pressures ultimately would have brought higher interest rates even if the Fed had not acted.

“Delaying our actions would not have been constructive,” he said. While refusing to rule out further rate increases, Greenspan also stressed that he believes the Fed’s actions so far should lead to solid economic growth without rapidly rising prices.

On Friday, the government said the economy grew at a 3% pace in the first quarter of the year, up from an earlier estimate of 2.6% but down sharply from the 7% level in the fourth quarter of 1993.

“Overall . . . this looks like a well-balanced economy,” Greenspan said. “This is looking to me as good as I’ve seen an economy evolving in a balanced form in a very long period of time. The economy is moving at a fairly respectable pace. . . . It could go on for quite a long period of time, provided that inflationary imbalances don’t emerge.”

Since February, the Fed has raised short-term interest rates four times in a controversial effort to cool the economy before it gets so overheated that it begins to generate a surge in inflation. Fed officials are now convinced that they kept interest rates too low for too long as the economy began to recover last year and that, before they acted in February, the economy was growing at a pace too rapid to be sustained without a run-up in prices.

Greenspan noted Friday that the central bank’s easy-money policies of 1993 may also have led to an unhealthy increase in speculative activity in the financial markets, and he said Fed officials believed they had to raise rates to burst that bubble.

Some senators, however, complained that the Fed was too concerned about appeasing the nation’s financial markets and had moved so aggressively that its interest rate increases are now hurting average Americans.

Committee Chairman Donald W. Riegle Jr. (D-Mich.) urged Greenspan to pause for a time. “It would be foolhardy for us to needlessly bring this economic expansion to a premature shutdown,” Riegle said.

Other committee members complained that the Fed has raised rates to curb inflation at a time when there is virtually no evidence of rising prices.

Sen. Paul S. Sarbanes (D-Md.) added that many of his constituents are upset that the Fed’s actions have made it impossible for them to buy homes. “We’re getting calls in my office from people now who can’t afford to go through with their commitments on building new homes because they can’t handle the monthly payments,” Sarbanes said.

The Fed’s moves to raise short-term rates have had a cascading effect on other market interest rates and the rest of the economy by making it more expensive for businesses and consumers to borrow for either investments or purchases. And the lawmakers noted that the U.S. economy is now more sensitive than ever to changes in Fed interest rate policy because so many mortgages and other consumer loans carry adjustable rates, which can be changed relatively quickly.

Sarbanes, who is also vice chairman of the Joint Economic Committee, complained that Greenspan tightened monetary policy just after the Administration and Congress tightened fiscal policy with last year’s deficit-reduction agreement.

He argued that, because Greenspan had urged Congress repeatedly to cut the deficit, the Fed should now reward the nation by keeping interest rates low.

Greenspan disagreed that Fed policies would sacrifice the health of the overall economy to please Wall Street investors.

Also Friday, a senior Administration official said in an interview that, while the Fed’s actions so far have been acceptable, he is concerned that any further rate increases by the central bank will begin to damage the economy.

The Clinton Administration so far has been careful to avoid direct criticism of the Fed’s policies.