WASHINGTON -- Federal Reserve Chairman Alan Greenspan told Congress Thursday that the Fed is prepared to raise interest rates if inflation does not fall further.

As the balance sheets of household and corporations continue to improve, he said, real short-term rates must rise in order to maintain balanced long-term growth. And in the absence of lower inflation, that will mean higher nominal short-term rates, he said.

"The signal we are endeavoring to send here is that at some point rates are going to have to move up," he said in testimony before the Senate Banking Committee.

Fed Concerns

And although the Fed chief said he sees no signs of higher inflation in any of the economy's Major industries, the Fed remains concerned that expectations of higher levels persist.

"If certain events occur which create not an inflation psychology but real inflation, as a consequence then we might - and I underline might - have to act," he said.

Mr. Greenspan presented his semiannual monetary policy report to the Senate two days after sharing the same report with the House. He came under heavy fire from the senators, who urged the Fed's cooperation with budget deficit reduction.

Call for Low Rates

Time and time again, members of the committee said that because reducing the deficit will put a drag on the economy, the Fed must keep interest rates low to counteract that force.

"In my judgment, this cooperation has probably never been more critical than it is right now," said Sen. Jim Sasser, R-Tenn. "The Federal Reserve has got to be a full partner in this endeavor."

At the hearing, Sen. Alfonse D'Amato, R-N.Y., asked for the Fed's continued support for his proposal to encourage the development of a secondary market for small-business loans, helping to ease the credit crunch.

Sen. D'Amato said the Fed chairman has already pledged support of the concept, if not all the details, of the bill.

Letter from Gonzalez

As the Fed chairman testified before the Senate, House Banking Committee Chairman Henry B. Gonzalez sent a letter to President Clinton asking him to pressure the Fed into easing monetary policy further.

"Instead of this continued policy of virtual no growth, this is the time to urge the Federal Reserve to follow a monetary policy that is consistent with your policies to put our citizens back to work," he wrote.

Mr. Gonzalez also urged the President to change banking laws. so that the 12 presidents of the Fed's district banks are made presidential appointees subject to Senate confirmation. Currently, the presidents are selected internally by the Fed. Mr. Gonzalez cited last week's selection of William J. McDonough to be president of the New York Fed as an example of the "old boy's bank network" that excludes qualified women and minorities.

"Because has been selected through the Federal Reserve's internal private mechanisms, he will manage our nation's money supply without ever going before the American people or their representatives," he wrote.

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