Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SATURDAY, February 20, 1993 TAG: 9302200095
SECTION: BUSINESS PAGE: A-7 EDITION: METRO
SOURCE: Knight-Ridder/Tribune
DATELINE: WASHINGTON LENGTH: Medium
FED THROWS SUPPORT TO CLINTON'S FISCAL PLANS
Federal Reserve Chairman Alan Greenspan on Friday praised the Clinton administration's new fiscal proposals, but would not indicate where the Fed's monetary policy might be headed.Greenspan presented to Congress his semiannual testimony on the economy and monetary policy, as mandated by the Humphrey-Hawkins law. In his three-hour congressional hearing, he also presented 1993 forecasts by the Fed's policy-making arm, the Federal Open Market Committee, for economic growth, inflation, unemployment and money growth.
But in a supplementary statement to his testimony, Greenspan called President Clinton's economic plan outlined on Wednesday "a serious proposal" with "plausible" economic assumptions and detailed programs, as opposed to general goals.
Greenspan would not be pressured into commenting on individual aspects of the plan, saying it was not the role of the central bank to critique details of a fiscal policy.
"Our concern is with the end result, and we wish you well," Greenspan told the Senate Banking Committee.
Greenspan emphasized, however, that he was perturbed that the federal budget deficit, even with Clinton's plan, was on track to expand again after 1997. He added there is "no doubt" that tackling health care costs - which form an increasing part of the deficit - is going to be "crucial."
He said cutting the deficit would be very difficult, but "it is going to be extraordinarily important to this country."
Greenspan would not promise lawmakers a monetary policy easing of short-term interest rates in conjunction with Congress' adopting fiscal restraint. He played down fears that the deficit reduction can be overdone and undermine growth, calling such fears "misplaced."
Any dampening effect from fiscal restraint might be offset by lower long-term interest rates, he said.
Indeed, long-term interest rates have already fallen somewhat because many market participants believe Congress will take steps to bring down the deficit, Greenspan said. He said "evidence strongly suggests a growing awareness that we may be coming to grips with this issue for real."
In describing the economy Friday, Greenspan had little to add to his testimony to two congressional committees late in January:
Economic growth continues well below the pace of previous early expansions, but then the United States has faced unprecedented restraints, such as defense cutbacks, debt overhang, excess commercial real estate and corporate restructuring, he said.
Greenspan defended the Fed's move to reduce its 1993 money supply targets as technical and in no way designed to "thwart the expansion." Some lawmakers were concerned the Fed was allowing the money aggregates to grow too slowly, but Greenspan explained Friday that the aggregates no longer reflect underlying economic activity.
He said the existing slack or spare capacity in the economy implies activity "can grow more rapidly than potential [gross domestic product] for a time." Greenspan was referring to the maximum sustainable growth rate of GDP without inflation, which economists peg at about 3 percent.
He said job growth has been "insufficient," but noted that productivity has been growing "fairly rapidly," thus increasing the real incomes of those employed.
The credit crunch was "undoubtedly a problem" for small businesses, that in turn are major engines of job creation, Greenspan said. But he said the credit picture now is "not getting worse and may be getting slightly better."
He acknowledged that banks have sufficient liquidity to lend, but are still reeling from the bad experience of nonperforming loans of recent years - especially in real estate - and of stricter regulation.