Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: FRIDAY, July 13, 1990 TAG: 9007130149
SECTION: BUSINESS PAGE: A7 EDITION: METRO
SOURCE: Associated Press
DATELINE: WASHINGTON LENGTH: Medium
His comments to the Senate Banking Committee launched rallies on the stock and bond markets and were good news for President Bush, who has been pounding on the Federal Reserve for months to cut interest rates.
The administration needs lower rates to counteract the dampening effect on the economy if spending is lowered and taxes raised as part of a budget deficit reduction plan.
Business owners have been saying since winter that banks have tightened lending standards in response to the savings and loan crisis, a softer economy and weakening real estate markets.
It is rare for the central bank's chairman to so strongly signal the future direction of interest rates. Usually he declines comment on the subject or uses deliberately ambiguous language.
Until Thursday, however, Greenspan had said the central bank saw little evidence of a broad-based credit crunch affecting the economy nationally.
In a sharp change from his assessment only three weeks ago, he told the committee that slow growth in the money supply and an increase in average interest rates on commercial loans indicate that credit conditions may be tightening independently of central bank action.
"If that is in fact the case, it could have undesirable effects on the economy that the Federal Reserve would have to consider offsetting using monetary policy," he said.
Such a shift would produce "a very modest change in the level of the federal funds rate," the key rate banks charge one another for overnight loans, he said.
"It's not that we are seeing the economy eroding. . . it's that we're seeing that we're getting more credit tightening in the market than we had as far as our policy stance is concerned," he said.
by CNB