Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: WEDNESDAY, July 25, 1990 TAG: 9007250187
SECTION: BUSINESS PAGE: A5 EDITION: METRO
SOURCE: Associated Press
DATELINE: WASHINGTON LENGTH: Medium
Greenspan said the Fed was still intent on achieving "within a few years" its goal of pushing inflationary pressures close to zero.
Private analysts saw Greenspan's comments before a House Banking subcommittee as an attempt to remove doubts in the financial markets that the central bank was wavering in its commitment to fighting inflation.
There had been concerns that the Fed was buckling to heavy pressure from the Bush administration to ease credit conditions during an election year even though inflation is still viewed as a threat.
Last week, Greenspan said the central bank stood ready to cut interest rates once Congress and the administration agree on a credible $50 billion to $60 billion deficit reduction package if such a move was needed to prevent a recession.
In his Tuesday testimony, Greenspan said the actual response of the Fed to any deficit-cutting agreement would depend very much on how financial markets viewed the package.
He predicted that a deficit agreement that was seen as "credible and enforceable" would invoke a "very significant response" toward lower interest rates in financial markets. He said any action on the part of the Fed to accelerate a move to lower interest rates would be taken only "in the context of not inducing inflationary pressures."
Greenspan said a flare-up of inflation would offset the economic benefits of a lower federal budget deficit.
His comments came in response to questioning by Rep. Stephen Neal, D-N.C., who is sponsoring legislation that would require the Fed to pursue a goal of achieving "zero inflation."
Neal said he believed Monday's steep drop in the stock market was caused by general worries that the Fed was wavering in its inflation battle.
Greenspan said the central bank was not backing away from its support of Neal's legislation. He said the Fed has been clamping down on the amount of money it provides to the nation's banking system and that because of this the money supply over the past three years has been growing at its slowest rate since the 1950s.
Greenspan said a decision to ease credit slightly two weeks ago should not be viewed as a deviation from the Fed's overall goal of pushing inflation down.
Elliott Platt, director of economic research at Donaldson, Lufkin & Jenrette, said that Greenspan's comments should help to ease market anxieties.
"It took away from any negatives he created when he seemed to be wavering" last week, Platt said.
Greenspan testified that the recent report showing that consumer prices jumped 0.5 percent in June had added a "note of caution" to the inflation outlook and a continuation of that increase would clearly be "very troubling."
But, he said, the June increase and other bad inflation figures did not reflect recent gains the Fed has made by slowing the growth of the money supply.
by CNB