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Fed May Lower Interest Rates

January 23, 1991

WASHINGTON (AP) _ Federal Reserve Chairman Alan Greenspan, confronted by angry senators and new evidence on the severity of the recession, said Wednesday the central bank was considering a further reduction in interest rates, among other options, to combat the downturn.

Greenspan’s acknowledgement of possible new rate reductions came as the central bank released a natiowide survey showing the country beset by job layoffs and widespread weakness in manufacturing, housing and retail sales.

The survey, based on information supplied by the Fed’s 12 regional banks, found the energy sector was the only bright spot in an otherwise lackluster economy as the year began.

Greenspan underwent some sharp questioning from Senate Banking Committee members who wanted to know why the Fed had not been more aggressive in lowering interest rates to ward off the recession.

Sen. Alfonse D’Amato, R-N.Y., charged that the Fed’s recent credit easing moves were ″too little, too late″ and said the central bank was still overly concerned about inflation.

″People are going to starve out there and you are going to be worried about inflation,″ D’Amato told Greenspan.

D’Amato and other members of the committee said they remained particularly concerned that federal regulators, worried about a repeat of the savings and loan crisis, were hampering the ability of banks to make loans to credit- worthy customers.

For his part, Greenspan indicated a new sense of urgency in dealing with this slowdown in bank lending, saying at one point that ″time is not on our side″ in letting marketplace competition trigger new lending.

Greenspan cited the credit crunch as a contributing factor to the recession and said the constraints on lending were adding to the length and severity of the downturn.

In addition to possible further moves to reduce interest rates, Greenspan said the Fed was looking at ″possible other strategies″ to promote increased bank lending.

He refused to provide any specifics about what those strategies were, saying he did not want to ″put on the table ideas which turn out to be impractical or unfeasible.″

While Greenspan did not mention it, one proposal being reviewed by the Bush administration is the creation of a special investment fund that would buy the nonperforming loans of weak banks, thus giving these banks the ability to make new loans.

The Fed’s survey of regional economic conditions listed a variety of problems confronting the economy from weak retail sales during the Christmas season and rising joblessness in manufacturing industries to a drop in farm exports and revenue shortfalls facing many state and local governments.

″The level of economic activity appears to be declining in most districts. The Persian Gulf situation is frequently cited as a key determinant of both current and future economic activity,″ the Fed said in the survey, which was conducted shortly before fighting began on Jan. 16.

The Fed survey, known as the beige book, is used as a guide by the Federal Open Market Committee, the top Fed policy-makers who meet eight times a year to chart the course for monetary policy. The next meeting of the FOMC is Feb. 5-6.

Greenspan’s remarks holding out the promise of further credit easing and the Fed survey showing widespread weakness prompted a rally Wednesday in the bond market where traders said they expected interest rates will be dropping more in coming weeks.

In an effort to fight the recession, the Fed has already moved on five separate occassions since late October to reduce a key interest rate, the federal funds rate. This rate, which is the interest banks charge each other, has declined by 1.25 percentage points and now stands at 6.75 percent.

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