FED HEAD HINTS AT INTEREST RATE CUT.

Byline: Richard W. Stevenson The New York Times

Alan Greenspan, the Federal Reserve chairman, suggested Wednesday that the central bank would seriously consider cutting interest rates next week because of the deepening world financial crisis.

``We have to bring the existing instabilities to a level of stability reasonably shortly, to prevent the contagion from really spilling over and creating some very significant further difficulties for all of us,'' Greenspan told the Senate Budget Committee.

His comments sent the stock market up strongly, and the Dow Jones industrial average closed 257.21 points higher, or 3.26 percent, to 8,154.41, its strongest level since the 512.61-point plunge Aug. 31.

Greenspan, who as usual left himself some wiggle room, hedged his comments by observing that the American economy remains strong and unemployment low, a combination that normally would lead the Federal Reserve to worry about inflation. And in a nod to members of the central bank's policy-making committee who might be reluctant to cut rates when they meet Tuesday, he emphasized that the decision was not his alone.

But in his clearest warning yet that the global crisis is threatening the nation's long economic expansion, Greenspan ticked off a series of developments over the past several months that could slow growth in the United States. They included the decline in the stock market, a reduction in lending by banks and a general rise in uncertainty that could make consumers more cautious.

``I can't comment at this particular stage on what particular actions will or will not be taken,'' Greenspan said when asked about the possibility of a rate cut Tuesday. ``But I really would suggest to you that I think we know where we have to go.''

The Federal Reserve has not cut interest rates since January 1996, when it reduced its short-term federal funds target rate to 5.25 percent from 5.5 percent. The only move it has made since then is a quarter-point increase back to 5.5 percent in March 1997.

Economists said the central bank still might take only a half step when it meets Tuesday and adopt a formal ``bias'' toward an ease in policy, a signal that it expects its next move to be a rate cut.

But there was a growing feeling among analysts that Greenspan will make a strong case at the meeting for an immediate cut of a quarter point and try to persuade the committee's more inflation-wary members.

``It means the odds now strongly favor him cutting rates on Sept. 29,'' said David Jones, chief economist at Aubrey Lanston & Co. in New York. Economists said Greenspan previewed the argument he is likely to make to the central bank's Federal Open Market Committee in saying Wednesday that ``deteriorating foreign economies and their spillover to domestic markets have increased the possibility that the slowdown in the growth of the American economy will be more than sufficient to hold inflation in check.''

Greenspan has couched his increasingly explicit discussions of the rationale for a rate cut in terms of protecting the domestic economic expansion, which began in 1991 and has seen inflation almost wiped out even as unemployment has fallen to its lowest level in more than 25 years.

But with much of Asia in recession, Russia in economic turmoil and Latin America increasingly at risk, industrialized and developing nations alike have been calling for a rate reduction in the United States.

A rate cut by the Fed could help the rest of the world by stimulating more growth in the United States, a major market for the goods and services produced in many struggling economies.

It also could weaken the value of the dollar relative to other currencies. That could help ease some of the financial pressure felt by governments, banks and companies around the world that are struggling with falling currency values and debts denominated in dollars. And it could provide a psychological boost to financial markets, which have been looking to Greenspan for signs of leadership at a time when governments and international institutions have provided few answers.

``It's a way of saying we're going to do our part to sustain growth in our own economy at a time when the world is fragile,'' said Robert DiClemente, an economist at Salomon Smith Barney in New York. ``Cutting rates in America doesn't solve the banking and debt restructuring problems of these troubled places, but you start to form a base for rebuilding confidence in the global economy and then hope everybody does their part.''