WASHINGTON -- Federal Reserve Chairman Alan Green span said Tuesday that despite some indications of renewed small-business lending, tight bank credit continues to constrict the economy.

In his semiannual monetary policy report to Congress, Mr. Greenspan said overall lending remains flat even though regulators have "pushed and pushed" banks to loosen up.

"I would scarcely argue that the so-called credit crunch phenomenon is over," he said. "It is not."

Senate Appearance Next

"Some of [what the regulators have done] has been helpful, but fundamentally this is a psychological problem," Mr. Greenspan told the House Banking Committee in the first of two congressional appearances mandated by the Humphrey-Hawkins Act.

Mr. Greenspan will go before the Senate Banking Committee

on Thursday.

His testimony included an unexpectedly pessimistic assessment of the inflation outlook and an apparent warning of higher interest rates, which depressed bond and bank stock prices on Tuesday.

"Despite disinflationary forces and continued slack, the rate of inflation has at best stabilized, rather than easing further as past relationships would have suggested," the Fed chairman said.

Mr. Greenspan said the Fed is estimating inflation this year of between 3% and 3.25%, which he termed "disappointing," amid real economic growth of between 2% and 3.5%.

M2 Growth Target Lowered

He vowed that regulators will continue to work together on initiatives to stimulate bank lending "until this issue is finally and fundamentally resolved."

Mr. Greenspan said the continued flight of bank deposits to mutual funds and other investments made current money-supply measures unreliable, leading the Fed to lower its M2 growth target for the rest of 1993 and 1994.

Cites |Structural Changes'

The new target will be between 1% and 5%, down from 2% and 6% during the first half of the year.

"To an important degree, the behavior of M2 has reflected structural changes in the financial sector," the Fed chairman said.

"The thrift industry has downsized by necessity and commercial banks have pulled back as well, largely reflecting the burgeoning loan losses that followed the lax lending of earlier years.

No New Variable Identified

"Inflows to bond and stock mutual funds have reached record levels, and, to the extent that these inflows have come at the expense of growth in deposits or money market mutual funds, the broad monetary aggregates have been depressed," he said.

The Fed chairman also conceded that "at least for the time being, M2 has been downgraded as a reliable indicator of financial conditions in the economy, and no single variable has yet been identified to take its place."

|Stiff Headwinds'

He again invoked the image of an economy "facing stiff headwinds," the most critical being "the combined efforts of households, businesses, and financial institutions to repair and to rebuild their balance sheets following the damage inflicted in recent years as weakening asset values exposed excessive debt burdens."

Much of Tuesday's testimony centered on the budget reconciliation process in Congress. While Mr. Greenspan continued to avoid discussing specifics, he reiterated his convictions on the importance of deficit reduction and urged Congress to cut spending.

A Pitch for RTC Funding

The Fed chairman also suggested that current deficit-reduction efforts will not by themselves remedy the problem. Several more attempts will be needed, he said.

During questioning, Mr. Greenspan also prodded Congress to fund the Resolution Trust Corp.

"The question is whether we do it in a sensible manner or a non-sensible manner," Mr. Greenspan said. "At the moment, the lack of funding for the RTC strikes me as a most inappropriate government policy."

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