WASHINGTON -- Federal Reserve Board Chairman Alan Greenspan was harshly criticized yesterday by Senate Democrats who complained that the central bank's policy of gradually lowering short-term interest rates has failed to ignite the economy.
Members of the Senate Banking Committee, commenting during Mr. Greenspan's semiannual Humphrey-Hawkins report on monetary policy, accused both the Fed and the Bush administration of a preoccupation with fighting inflation while the economy continues to fester.
In a hearing that dragged on for over four hours and was laced with political rhetoric by members of both parties, Mr. Greenspan defended the Fed's record and said policymakers remain hopeful that the recovery will do better over the next 18 months as consumers and businesses work off debt burdens.
Mr. Greenspan also had some ammunition of his own, urging Congress not to go along with major new spending initiatives that could add to the federal budget deficit. "It is essential that we bring the budget deficit down as urgently as we can because it is a corrosive force that is doing great damage to the American economy," said Mr. Greenspan.
At another point, Mr. Greenspan warned bluntly: "Fiscal stimulus is an immediate option but would be very risky."
"There is a trade-off," said Mr. Greenspan. "In my judgment we would be undercutting some of the longer-term growth and stability of this economy if we move in that direction. My personal inclination as citizen, not as a policymaker, is that I would choose not to do that. That is a major value judgment that the Congress and the American people have to make."
The sharp tone of confrontation was set at the outset in a statement by Committee Chairman Donald Riegle, D-Mich., who said, "the accumulating evidence shows that the American economy is in serious trouble, and the damage is piling up everywhere we look."
"The Federal Reserve policy adjustments, to help revive the economy, have not worked effectively," said Sen. Riegle, "Today we need some new candor and fresh thinking from the Fed. More of what we've heard before won't do."
Sen. Riegle charged that Mr. Greenspan and his colleagues had "repeatedly resisted" pleas from some members of Congress to act more aggressively to help revive the economy. Instead, he said, "you have applied the old-time economic medicine -- strangling the money supply in the name of fighting inflation. And now unemployment has risen to 7.8%."
Two Republicans on the committee, Sen. Phil Gramm of Texas and Sen. Pete Domenici of New Mexico, sought to deflect criticism of the Fed. They said some of the blame in dealing with the economy's problems has to rest with Congress for continuing to approve large budget deficits and for resisting elements in the growth package offered last January by President Bush.
But their comments did little to offset the tone of unrest that dominated the hearing.
Sen Paul Sarbanes, D-Md., said Mr. Greenspan's testimony that the economy will gradually improve was virtually the same message he delivered before to Congress.
"It's sort of like the President saying the economy is getting better, and the American people don't know it," said Mr. Sarbanes told Mr. Greenspan. "It's the same set of quotes we were getting from you last year and in February."
In his opening written statement to the committee, Mr. Greenspan tried to strike a balance by asserting that Fed officials expect to see a modest economic rebound unfold this year and in 1993 while admitting that they have been surprised by the high rate of joblessness and other problems.
He noted that the Fed has trimmed short-term rates 23 separate times since the federal funds rate was close to 10% in 1989, bringing it down to the current 3.25%. And, he said, the 3% discount rate is at a 29-year low.
Still, Mr. Greenspan admitted, the economic recovery so far "has been very hesitant."
He blamed the sluggish performance of the economy on the struggle by consumers and businesses to work off the debt piles they built up during the last decade. "The degrees of retrenchment has turned out to be much greater than experience since World War II would have suggested," he told the committee.
Banks continue to hold back on lending as they seek to improve their capital positions, and "demands for bank loans have stayed dormant," said Mr. Greenspan.
Eventually lower interest rates that reduce repayment burdens will help the economy rebound, said Mr. Greenspan, but he was not clear when that will happen. Some evidence suggests consumers "are not all that discouraged," he said, noting that auto sales have improved in recent weeks. And, he said weekly data seem to indicate that industrial production, which fell 0.3% in June, will be up in July.
In 1993, the Fed's preliminary forecast calls for growth of 2.75% to 3%, which would be better than this year's expected pace but only half the usual bounce in a recovery.
On inflation, the Fed forecast calls for the consumer price index to rise from 3% to 3.5% in 1992 and then improve slightly to a range of 2.75% to 3.25% in 1993.
The unemployment rate is projected to stay high, averaging 7.25% to 7.5% in the fourth quarter of this year, before slipping to a range of 6.5% to 7% next year.
Fed policymakers opted to leave their targets for money supply unchanged in 1992 and 1993. The target range for the broad M2 measure of money was left at 2.5% to 6.5%, and M3 was left at 1% to 5%. M3 includes M2 plus large time deposits and institution-only money market mutual funds. The range for growth of debt was kept at 4.5% to 8.5%.
Mr. Greenspan said Fed officials have spent a lot of time puzzling over the slow growth in the money supply, which has fallen below the central bank's target ranges. He repeated the view that the weak performance reflected the large shift by investors from low-yielding bank certificates of deposit to stock and bond funds as well as the takeover of thrifts by the Resolution Trust Corp.
The recent drop in rates is helping to boost bank earnings, said Mr. Greenspan. But committee members complained that banks are taking advantage of the Fed's easing moves to trim rates for depositors and to invest in the government securities market instead of stepping up loans.