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Fed Chairman Balks at Bush’s Push for Lower Interest Rates Graphic, LaserPhoto

July 16, 1991

WASHINGTON (AP) _ Federal Reserve Board Chairman Alan Greenspan, putting himself at odds with President Bush, indicated Tuesday the central bank will not move interest rates lower in the near future.

″Monetary policy has adopted a posture of watchful waiting as economic indicators have pointed increasingly toward recovery,″ Greenspan told the House Banking subcommittee on domestic monetary policy.

Private analysts interpreted Greenspan’s remarks as signaling the Federal Reserve sees no need to stimulate economic growth with further cuts in short- term interest rates, and will be satisfied with a lackluster expansion in the election year of 1992.

″His message is, ’Look folks we’re content with only a gradual recovery because we want to bring down inflation,‴ said economist Robert Dederick of Northern Trust Co. in Chicago.

In his most optimistic comments yet on the rebound, Greenspan said, ″There are compelling signs that the recession is behind us.″

He acknowledged the theoretical possibility of another lapse - a so-called ″double-dip recession″ - but said he found ″no credible evidence″ to suggest one was likely.

Instead, he emphasized the importance of encouraging what he called ″promising signs of a slowing in inflation″ as the economy emerges from the downturn that began in July.

″The progress against inflation that has been set in motion must not be lost,″ he said.

That likely won’t sit well with Bush, who last week nominated the 65-year- old economist to a second four-year term. In announcing the reappointment, Bush said he wanted interest rates as low as possible, and thus growth as strong as possible, without runaway inflation.

Analysts who follow the arcane inner workings of the Fed say the two stances are far apart.

The Fed is expecting the economy, as measured by the gross national product, to grow only a modest 2.25 percent to 3 percent from the fourth quarter of this year to the same period in 1992.

However, the Bush administration is looking for considerably stronger growth of 3.6 percent in 1992.

″That could eventually run him into conflict with the White House,″ said economist David M. Jones of Aubrey G. Lanston & Co. in New York. ″The administration wants the economy to grow more strongly to ensure Bush is re- elected.″

In a move viewed as a concession to the Bush administration, Greenspan revealed that Fed policymakers have decided not to reduce their principal money supply growth target from the current range of 2.5 percent to 6.5 percent.

Such a reduction, which has occurred in three of the last four years, would have tended to push interest rates higher, dampening both inflation and growth.

Greenspan, however, emphasized the extension of the current range is provisional and that, for now, it appears to provide enough leeway to allow either monetary tightening if inflation surges or easing if the recovery falters.

He said policymakers were wary of lowering the target for fear it would be interpreted as complacency toward the so-called credit crunch, which has seen banks reluctant to lend to borrowers they once considered creditworthy.

The credit crunch continues in some sectors, he said, but the central bank detected ″little further tightening over the spring.″

Rep. Stephen L. Neal, D-N.C., chairman of the subcommittee, questioned whether retaining the current money supply target was consistent with achieving price stability.

But, Greenspan said price stability could be reached without actually reducing the annual increase in the Consumer Price Index to zero. He said the Labor Department’s index, the most widely accepted measure of inflation, does not fully reflect quality improvements in products over the years. For instance, an auto made in 1991 should cost more than a similar model made 20 years earlier, even without inflation.

An annual increase in the CPI of 0.5 percent to 1.5 percent could be considered consistent with price stability, he said, adding, ″I don’t think we’re very far from that point.″

The Fed is projecting an inflation rate of 3 percent to 4 percent next year. Most private forecasts and the Bush administration’s prediction are in the upper end of that range.

Greenspan sought to calm alarm expressed by subcommittee members over the administration’s projection of a record $348 billion budget deficit next year, $67 billion higher than it estimated only five months ago.

He said much of the increase can be attributed to temporary spending for bank and savings and loan rescues and to swings in military spending associated with the Persian Gulf War.

The budget accord reached last October between Congress and the administration, which requires that new spending be offset with cuts elsewhere or new taxes, should lead to ″a very significant reduction of the deficit over time,″ he said.

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