Greenspan Hints Rate Hikes Over : Finance: Fed chairman is noncommittal, but he tells Congress that the economy appears to be cooling off. He even raises possibility of easing grip on monetary policy.

WASHINGTON — Federal Reserve Board Chairman Alan Greenspan hinted Wednesday that he may be ready to ease his foot off the brakes on the economy--and might even be willing to tap the accelerator ever so lightly to keep the recovery revving.

In wide-ranging testimony about the state of the economy and the policies of the nation’s central bank, Greenspan told Congress that mounting evidence the economy is cooling off could convince the Federal Reserve that it does not need to raise interest rates further to curb the threat of inflation.

After seven rate hikes in the last year, Greenspan strongly suggested that the nation’s central bank is close to achieving its goal of a sustainable economic recovery with relatively low inflation.

As a result, the Federal Reserve is leaving unchanged its long-range policy targets that will be used to guide decisions on interest rate moves for the next six months, he added.

“The first weeks of 1995 have offered some indications that the expansion may finally be slowing from its torrid and unsustainable pace of late 1994,” Greenspan told the Senate Banking, Housing and Urban Affairs Committee in his semiannual report to Congress on the long-range outlook for monetary policy.

“The performance of the economy in 1995 almost surely will pale in comparison with that of the previous two years,” he added.

That slower growth will come at a time when there are only slight hints of rising prices. As a result, for the first time since the early 1960s, inflation has been running at less than 3% for three years in a row--”a signal accomplishment,” Greenspan proudly observed.

Yet Greenspan was clearly fearful of sending the wrong message to Wall Street, which is always concerned about the inflationary threat. So the hints of a less aggressive policy were couched carefully in Greenspan’s testimony, making it clear that the chairman is still unwilling to commit himself to a less assertive course of action.

What’s more, Greenspan stressed that the Federal Reserve will remain on the lookout for signs of rising prices and will be ready to pounce if they appear.

Still, if the central bank does suspend its interest rate hikes, it will bring to an end the most aggressive and prolonged inflation-fighting effort that it has mounted since the early 1980s.

“There may come a time when we hold our policy stance unchanged, or even ease, despite adverse price data, should we see signs that underlying forces are acting to reduce inflation pressures,” Greenspan said.

Earlier this week, Vice Chairman Alan Blinder offered an even more explicit guide to the thinking inside the Federal Reserve when he said that the Fed is “close” to victory in its inflation fight and that the central bank must be prepared to reduce interest rates. In a speech in Richmond, Va., Blinder said the central bank should be just as willing to launch a preemptive strike against recession as it has been against inflation.

Since first moving rates higher 12 months ago, Greenspan has been engaged in a delicate--and risky--balancing act, one in which he has sought to ratchet down economic growth just enough to reduce the upward pressure on prices that comes from rising employment and increased consumer and business demand for goods and services. At the same time, he has tried to avoid slowing things down too much, to avoid a recession. The Federal Reserve calls that a “soft landing,” and Greenspan made it clear Wednesday that he thinks the economy is about to land safely.

The signals from the Federal Reserve that it may be willing to call a cease-fire in its yearlong war against inflation come as Greenspan faces intense criticism for his aggressive strategy. While that policy has won the Fed enhanced credibility in the financial markets, many economists believe that it will shorten the life of the economic recovery and could even lead to a recession by next year.

“Even though there are signs of slowing growth, one of the major risks to the outlook for the U.S. economy is a recession induced by tight monetary policy,” argued Ross DeVol, an economist at the WEFA Group, a forecasting firm based in Bala Cynwyd, Pa.

In particular, DeVol said he worries that the economic recovery on the West Coast “would be prematurely derailed” by Fed policies. Many critics are also convinced that the Fed may raise rates at least once more this year, despite the evidence of a slowdown.

Greenspan is clearly sensitive to the political effect of further rate hikes. Since there is a long lag time before the rate increases affect the economy, a decision by the Fed to raise rates in 1995 could easily lead to slower growth in 1996--right in the middle of the presidential campaign. In addition, Greenspan’s four-year term expires in March, 1996, and a recession then could spark a political controversy over his reappointment, or the choice of his successor.

Greenspan faced many of those sensitive political issues during Wednesday’s hearing. While Republicans attacked the Clinton Administration’s bailout of Mexico, in which Greenspan and the central bank played critical roles, Democrats criticized Greenspan for his interest rate policies.

Some liberal Democrats also scored him for his apparent support for GOP plans to abolish the requirement that the Fed try to meet two conflicting objectives: full employment and price stability.

* MARKET RALLY: Bond interest rates fall after Greenspan’s remarks. D3