Federal Reserve Chairman Alan Greenspan warned Wednesday that the recession could be worsened by a lengthy Persian Gulf war and continuing problems in the nation's banking system.
In written testimony to Congress, Greenspan pledged that the Fed would "remain alert" to changes in the economy in conducting its interest rate policies in coming months.Over the past three months the central bank has been lowering interest rates in an effort to spark an upturn.
"It would be most unwise to rule out the possibility that the recession may become more serious than already is apparent," Greenspan said in his semiannual report to Congress on monetary policy.
Among the dangers cited by Greenspan was the possibility that an extended war in the Persian Gulf would undercut public confidence and further weaken consumer spending.
He also cited a further slowdown in bank lending and increased public concern about the weakness of the U.S. banking system as other risks to a rebound in economic activity.
In addition to holding out the possibility of lower interest rates, Greenspan said the central bank and other federal banking regulators were exploring various regulatory changes to encourage banks to make more loans.
Greenspan said the changes would seek to ensure "that bank examination standards are prudent and fair" and provide the flexibility to allow banks to make loans to credit-worthy borrowers. These changes, which have been pushed by the Bush administration, are expected to be announced later this week.
Greenspan's appearance before the Senate Banking Committee came shortly after the government released a report showing that consumer prices jumped 0.4 percent in January, in spite of a fall in energy prices. The January rise would translate into an annual inflation rate of 5.5 percent.
Greenspan, in his written comments, said that the easing in inflationary pressures in recent months had been a key factor that had allowed the central bank to lower interest rates so aggressively.