Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: WEDNESDAY, February 23, 1994 TAG: 9402230206
SECTION: NATIONAL/INTERNATIONAL PAGE: A-1 EDITION: METRO
SOURCE: The Washington Post
DATELINE: WASHINGTON LENGTH: Medium
The alternative to higher rates, Greenspan told the House Banking subcommittee on economic growth, is a build-up of inflationary pressures that would destabilize the U.S. economic expansion and eventually choke it off.
Looking forward, the Fed will try to provide a policy on credit and interest rates that "will minimize economic instabilities and maximize living standards over time," the Fed chairman said.
"The outlook, as a result of subdued inflation and still low long-term interest rates, is the best we have seen in decades," Greenspan said.
But long-term interest rates rose sharply after the Fed raised its target for the federal funds rate - the interest rates that financial institutions charge each other for overnight loans - from 3 percent to 3.25 percent Feb. 4.
Long-term rates, such as those on 30-year U.S. government bonds, fell Tuesday after Greenspan spoke, but they remained about four-tenths of a percentage point higher than they were at the end of last month.
Sam Kahan, chief economist at Fuji Securities in Chicago, described Greenspan's testimony as "rather straightforward and blunt. He said, `I tightened, and I am going to tighten again.' "
Wall Street's reaction to Greenspan's remarks was positive, as the Dow Jones industrial average rose 24.20 points to 3,911.66, and analysts said the market's fears of an immediate increase were calmed.
At the White House, President Clinton focused on only part of Greenspan's remarks. "I think the main good news for Americans is that Mr. Greenspan said that conditions for long-term growth are good, conditions for low inflation are good, and that's what we believe," he told reporters.
While Clinton avoided the issue of short-term rates, he said that the spread between short and long rates is unusually wide by historical standards, so there is room for long-term rates to fall even if short rates do not.
Greenspan suggested the same thing. He said long-term rates have gone up as much as they have because recent statistics do not show economic growth slowing from the very rapid pace of the final three months of 1993 as much as many economists had predicted for this year.
If growth slows to a more sustainable 3 percent rate, he said, "then we are likely to see adjustments in the markets" - that is, with long-term rates coming down again.
Greenspan said the Fed acted to increase rates after concluding that the risk of slowing economic growth by raising rates was less than that of damaging the economy later by keeping rates down, letting inflation worsen and then having to increase rates to a much greater degree to rein in inflation.
An array of indicators, including rising industrial commodity prices and rapid economic growth, suggested that the time had come to make monetary policy more "neutral" in its impact on the economy, Greenspan said.
For a lengthy period, rates had been held unusually low to aid debt-burdened businesses, financial institutions and consumers and thereby stimulate growth, he said.
"We viewed our move as low-cost insurance," Greenspan said.
Keeping that insurance in force likely will require more short-term rates increases, he indicated, because inflation-adjusted, or real short-term rates, still are close to zero.
"To promote sustainable growth, history suggests that real short-term rates are more likely to have to rise than fall from here," Greenspan said.
Kahan of Fuji Securities questioned Greenspan's explanation for why the Fed raised rates.
"He did not really give any reasons for doing it other than to say, `I am worried about the future,' " he said. "The truth is, he is gambling that he has got it right and can nip [inflation] in the bud."
Separately, administration officials said they expected to announce soon that White House economic adviser Alan Blinder, 48, would be named vice chairman of the Federal Reserve, the Los Angeles Times reported. This would make him what an administration official called a "leading candidate" to succeed Greenspan when Greenspan's second term expires in 1996.
by CNB