WASHINGTON -- Federal Reserve officials are determined to raise short-term interest rates at some point to prevent a pickup in inflation, Chairman Alan Greenspan said yesterday.
In a surprisingly blunt statement, Greenspan dismissed appeals from Democrats on the Senate Banking Committee to maintain an easy monetary policy as a counter to any dent in the economy that might arise from enactment of President Clinton's deficit reduction program.
"Our major concern is that we do not inadvertently fall into the experience of the late 1970s or early 1980s where we were way behind the curve, did not anticipate the degree of inflationary expansion that was going on." Greenspan told the panel. "So the signal we are endeavoring to send is that at some point rates are going to have to move up.,"
Greenspan said he does not know when Fed officials will have to raise rates. But he made clear that policymakers believe the end is coming for their three-year-old policy of pushing down short-term rates in response to the credit crunch and a soft economy.
He said short-term rates, which include the current federal funds rate of 3%, have dropped below "what is perceived to be their equilibrium" level. "At some point, we are going to have to restore the balance, I don't know when that is."
Greenspan said one reason Fed officials expect they will have to tighten policy is to pursue their fight for price stability. He repeated the view, which he voiced on Tuesday before a House Banking subcommittee, that inflation developments this year have disappointed the central bank.
The Fed's revised forecast calls for consumer prices to rise in a range of 3% to 3 1/4% this year, arid by 3% to 3 1/2% in 1994. The projections have been taken by some bond market participants as evidence that the central bank has given up on its efforts to lower inflation.
Greenspan also argued that "to the extent that we, can keep inflation subdued, we will maximize growth and productivity," which in turn would contribute to the economy over the long haul.
Democrats on the panel, led by Chairman Donald W. Riegle, D-Mich., repeatedly urged the, Fed to hold off on raising rates to. compensate for the deficit reduction legislation that Senate and House conferees are hoping to complete work on by the end of next week. Even supporters on the economy.
"I would hope the Fed would not get into a monetary tightening situation that would choke off this sort of struggling economy, such as it is," said Riegle. "We're just not getting the kind of job growth I think we should be seeing."
Riegle also complained that Fed officials are overly concerned about rising prices. "I know we have a couple of months of data that appear to be anomalies early in the year, but I think we need more job lift," he said.
"Clearly, fiscal contraction entails downside risk," said Sen. James R. Sasser, D-Tenn. "I must urge once again that the Fed must pick up the slack." He went on, Coordination of fiscal policy is essential. In fact it is critical and crucial for the success of this deficit reduction plan."
Republicans on the committee joined in defending Greenspan and the Fed's tough stance on rates. "You are going to be under immense pressure to reinflate the American economy," said Sen. Phil Gramm, R-Texas. "I don't believe for a second that you can impose the taxes in paying for the Clinton economic program and not have the economy stagger under the weight of those taxes. And it is clear in listening to our colleagues here today, it's clear in listening to the administration, that they plan to ask the Federal Reserve Bank to bail them out."
Gramm added, "We have an independent Federal Reserve to protect us from this kind of political pressure."
At the end of the hearing, Riegle also delivered a lecture to Greenspan, and charged that Fed policymakers are more concerned with protecting the assets of wealthy investors than they are with reducing unemployment and building up the household incomes of working families. Greenspan dismissed the charge.
In a separate development, House Banking Committee Chairman Henry B. Gonzalez, D-Tex., yesterday released a letter to President Clinton asking him to support legislation that would require Federal Reserve Bank presidents to be appointed by the President, subject to Senate confirmation. The Fed opposes the legislation.
Gonzalez said Congress will not get a chance to scrutinize the Federal Reserve Bank of New York's selection of William McDonough to replace E. Gerald Corrigan, who retired this week as president. The president of the New York Fed has a permanent seat on the Federal Open Market Committee, which sets monetary policy.