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Fed has options to stimulate economy

Federal Reserve chairman Alan Greenspan said Tuesday that the Fed would not be "out of business" in terms of stimulating the economy even if it should push a key interest rate to zero.

Greenspan used his appearance before the Council on Foreign Relations to dispute worry expressed by some private economists that the Fed may be running out of ammunition to jump-start the lagging economic recovery.

The central bank two weeks ago cut its target for the federal funds rate, the interest that banks charge on overnight loans, by a bigger-than-expected half point to 1.25 percent, the lowest level in 41 years.

"The general view is that, as the Fed funds rate gets closer and closer to zero, that at zero we are out of business," Greenspan said. "That is not the case."

Greenspan said the Fed could buy other U.S. Treasury securities with varying terms of maturity to pump cash into the financial system and stimulate economic activity.

Greenspan recalled that from 1942 to 1951, the Fed bought 25-year Treasury bonds at a fixed interest rate of 2.5 percent as part of an agreement with the U.S. Treasury to keep borrowing costs low to support the war effort.

"We are very far from the Fed being restricted" in its ability to stimulate the economy, Greenspan said. His remarks were an expansion of comments he made last week before the congressional Joint Economic Committee.

Greenspan did not give a hint during his appearance whether the central bank will lower interest rates again, but private economists think the Fed stands ready to cut rates further if needed to keep the economy from dipping back into recession.

Many analysts think economic growth in the final three months of this year may slow to an annual growth rate of 1 percent or less, reflecting cutbacks in consumer spending prompted by rising worries about job layoffs and a possible war with Iraq.

Greenspan said during the question-and-answer session that war worries were "a very large hurdle" impeding business plans to increase their investment spending. But he said once the country is past these uncertainties, the economy should rebound.

Greenspan also urged Japan and Germany to do more to deregulate their economies as a spur to global growth, saying the United States has led the way in this area.

"We have had 25 years of extraordinary deregulation in this country," he said.

Greenspan used his prepared remarks to urge, as he has before, that governments guard against a tendency to overregulate financial markets. He said the growth of new, innovative financial instruments played a major role in suppressing damage from the economic shocks that have hit the U.S. economy.

"Despite the draining impact of a loss of $8-trillion of stock market wealth, a sharp contraction in capital investment and, of course, the tragic events of Sept. 11, 2001, our economy is still growing," Greenspan said.

"Importantly, despite significant losses, no major U.S. financial institution has been driven to default," he said.

Greenspan gave credit for this development to a rapidly evolving financial system that has allowed lenders to become more diversified and borrowers to be far less dependent on a single market for financing.

As he did in a London speech in September, Greenspan praised the various elements of the evolving financial system, including the growth of derivatives, investments that are linked to an underlying asset such as a stock or bond or financial index.

Greenspan has warned Congress often over the years against overregulating the $111-trillion derivatives market. He repeated the caution Tuesday.

"The extent of government intervention in markets to control risk-taking beyond the commonly practiced control of systemic risk is, at the end of the day, a trade-off between economic growth with its associated potential instability and a more civil and less stressful way of life with a lower standard of living," Greenspan said.

Last April, the Senate rejected an attempt by Sen. Dianne Feinstein, D-Calif., to impose greater regulations on derivatives. She said her proposal would have closed a loophole that allowed energy giant Enron to buy and sell energy holdings last year largely in secret. The Houston company filed for bankruptcy in December.