WASHINGTON -- Federal Reserve Chairman Alan Greenspan on Wednesday defended the central bank's efforts to stir the flagging economy with a series of small, increment interest rate cuts.
In wide-ranging testimony before the House Ways and Means Committee, Mr. Greenspan described a string of 14 interest rate cuts over the past two years as "quite extraordinary."
But lawmakers echoed ongoing criticism that the Fed should have cut rates quicker to counter the recession. Committee members pressed the Fed chairman to make a bold move - cutting rates by one or two percentage points -- instead of smaller moves.
There had been widespread speculation that the Fed would move to cut short-term rates Wednesday, but it did not do so. Asked if there was room for further cuts, Mr. Greenspan replied: "We are looking at the situation exceptionally closely. And should, in our judgment, further action be required, you can expect us to do so."
Congress in the Slow Lane
Rep. Thomas Downey, D-N.Y., said the problem of reviving the economy is in the Fed's hands. The central bank can stir economic activity quickly through rate cuts while Congress has to take the slow path of legislation, he said.
Mr. Greenspan appeared before the panel during a two-day meeting of the policy-setting Federal Open Market Committee and his comments appeared somewhat muted because of the unusual timing of the testimony.
The Ways and Means Committee has been meeting during the congressional recess to assemble a package of tax incentives and spending initiatives to stimulate the economy.
Measures have been proposed by the Bush administration, House Republicans, and Ways and Means Committee Chairman Dan Rostenkowski, D-Ill, and are expected to receive swift attention when Congress reconvenes in January.
The Fed chief reiterated his support for a key element of President Bush's plan -- cutting the capital gains tax rate. Such a cut, he said, could be a big boost to banks, thrifts, and other holders of real estate collateral.
"A capital gains tax cut would buoy property values, which would alleviate in part the collateral shortfalls that plague our financial institutions," Mr. Greenspan said. "This could induce greater financial intermediation and balance sheet liquification."
Caution on Commercial Side
But Mr. Greenspan warned against creating new incentives for commercial construction.
"The last hing we need at this moment is more vacant office space," the Fed chairman said. If Congress feels it is necessary to reinstate tax breaks for real estate -- such as passive-loss treatment -- the incentives should apply to existing properties only, he said.
Policies oriented toward long-term stability and growth will do more for short-term economic expansion than any "quick fix," Mr. Greenspan said.
Deep-seated worries about the long-term economic outlook have made consumers unusually apprehensive, even though the economy "is not really all that bad," Mr. Greenspan said.
Home Prices Are Improving
He noted that unemployment levels and layoff rates are lower than those experienced in other recessions, and that home prices -- the cornerstone of individual wealth for most Americans -- are improving.
"I suspect that what concerns consumers, and indeed everyone, is that the current pause may be underscoring a retardation in long-term growth and living standards," Mr. Greenspan said.
