Fed Chief Sees Modest Growth

The U.S. economy, despite a “dismal” performance recently, is holding to a path of modest growth with subdued inflation, Federal Reserve Board Chairman Alan Greenspan testified Tuesday in remarks that seemed to reduce prospects of major interest-rate cuts this year.

Greenspan’s comments, made during a semiannual report to Congress, underscored the continuing policy conflict between fighting inflation and pushing for growth in a fast-changing economy that has left many workers worried about the future.

“A number of fundamentals point to an economy basically on track for sustained growth, so any weakness is likely to be temporary,” Greenspan said.

The chairman’s view rattled the bond market, which has anticipated that the fragile recovery would prompt significant reductions in interest rates in coming months. Prospects that rates will remain higher than expected could reduce the attractiveness of bonds, which rise in value as interest rates fall and decline as interest rates rise.

Bond prices suffered Tuesday, with yields on the 30-year Treasury bond rising to 6.41%, the highest level since Oct. 11. Stocks also had a rough day, with the Dow Jones industrial average losing 44.79 points to close at 5,458.53.

For all that, Greenspan maintained that inflation appears under control--which suggests that the Fed still has room to lower rates somewhat, following cuts in December and January. Many analysts expect further rate cuts, perhaps a quarter of a percentage point or more, in the next several months.

“The success during 1995 in keeping the increase in the consumer price index below 3%, in the fifth year of an expansion, illustrates that an extended period of growth with low inflation is possible,” he said.

Greenspan’s careful testimony came at a time of growing political pressures on the Fed. President Clinton has appealed for a new debate on the U.S. economy’s potential to grow, and Republican presidential hopefuls also have called for greater growth.

Clinton is expected within the next several days to nominate Greenspan for another four-year term as Federal Reserve chairman, although some in the administration believe that the agency has been so preoccupied with fighting inflation during Greenspan’s tenure that job growth has suffered.

In filling two other vacancies on the board, which sets interest-rate and other policies, the administration may seek economists who would put a greater emphasis on growth than has Greenspan.

“The president is interested in the strongest possible nominees for the Federal Reserve Board and he’s made it clear he thinks there should be a representation of views on the board that reflects the debate among economists and specialists on how best to stimulate economic growth,” White House Press Secretary Mike McCurry said Tuesday.

The economy’s recent on-again, off-again record was highlighted Tuesday by the government’s official forecasting tool, which showed that the economy rose 0.2% in December, following a three-month slump, according to the Conference Board.

The rise in the index of leading economic indicators was fueled by reduced claims for jobless benefits, higher stock prices, rising consumer confidence, a gain in orders for big ticket items, such as home appliances, and other business activity.

In his testimony, Greenspan noted that the economy looked unusually weak in January and that the picture for February has not been fully established. The causes, he said, include transitory problems, such as snowstorms and the shutdowns of the federal government, which help explain why the weakness may not last.

Greenspan also suggested that high consumer debt levels may be yet another drag on expansion.

However, he said that other strengths argue in favor of a continuing recovery. Among these are low interest rates, which encourage home purchases and business investments; a stock market rally, which has enriched many households; and the healthy condition of most financial institutions.

In 1995 the economy performed “reasonably well,” Greenspan said, with 1.75 million new payroll jobs, inflation well contained and the lowest sustained jobless rate in five years.

He predicted that the economy would grow at about 2% or slightly higher this year and that unemployment would remain near current levels, which averaged 5.6% last year but ticked upward to 5.8% in snowy January.

Nonetheless, such forecasts have brought criticism that the Fed is not sufficiently pushing for greater growth and opportunity at a time when companies continue to lay off workers and the income gap between haves and have-nots has widened.

“Growth in the economy is not being shared by all Americans equally,” said Rep. Maurice D. Hinchey (D-N.Y.). “There are a great many people in this economy who are being left behind.”

The Federal Reserve Board generally believes that the economy cannot grow much faster than 2.5% without accelerating inflation. On Tuesday, Greenspan acknowledged widespread anxieties in the work force. The long-term answer, he said, would come through greater investment, education and on-the-job training that enables workers to thrive in a world of changing technology.

* RELATED STORIES: D1, D3