Fed Chief Says Rate Cuts Possible

Helping to calm jittery financial markets, Alan Greenspan, the chairman of the Federal Reserve, told the Senate Banking Committee on Wednesday that further rate cuts are possible as long as inflation stays low.

While Greenspan’s overall testimony was little different from his statements that spooked the markets on Tuesday, investors nonetheless seized on the Fed chairman’s comments to bid up both bond and stock prices.

“The most probable outcome is coming out of this soft patch into moderate growth with low inflation,” Greenspan said. But if the economy fails to improve as expected, Greenspan indicated that the Fed stood ready to respond with further stimulus.

“If we envisage that inflationary pressures are significantly subdued, it would not be inconsistent to move rates lower, as we did on Jan. 31,” he said.

Analysts suggested that Greenspan, aware of how closely his comments are followed, may have been playing to the markets after the negative assessment of his remarks to a House subcommittee the day before in which he described the economy as “on track for sustained growth.”

Many investors took that to mean that the easing of monetary policy they had been counting on was less likely to happen soon.

Paul Kasriel, chief domestic economist for Northern Trust Co., said that Greenspan said similar things both days but that on Tuesday he neglected to say the more or less obvious - that the economy’s condition might still allow for another round of rate cuts.

“Luckily he got another chance today,” Kasriel said.

John Williams, a senior economist at Bankers Trust, echoed those comments, saying that it would be a mistake to regard Greenspan’s confidence about the economy’s underlying health as ruling out rate cuts should conditions dictate.

Greenspan also took the opportunity to blame the slump in the bond market in the last week to a growing fear that Congress and the Clinton administration would fail to reach a budget agreement, rather than as a signal that inflation was picking up.

Ebbing of budgetary resolve, Greenspan told the committee, was “to a large extent” the reason for the bond market deterioration.