Federal Reserve Chairman Alan Greenspan yesterday said the 1988 economic outlook is so uncertain that chances are about equal that the Fed will have to lower interest rates to fight a recession or raise them to hold down inflation.

In his first monetary policy report to Congress, Greenspan said the Fed's forecasts for 1988 assume that the economy will avoid either of those extremes, producing slower but continued growth. But the Fed might not be that lucky, he indicated.

"The setting for monetary policy for the year 1988 and beyond is more than normally complex," Greenspan told the House Banking Committee in his first monetary policy report to Congress.

"While the economy itself is well into the sixth year of expansion, the forward momentum of that expansion has been brought into question, and we continue to run sizable external deficits with associated dependencies on foreign savings; at the same time, inflation rates, while below those of earlier in the decade, are still high in a long-term perspective," he said. "Our approach to monetary policy in 1988 will require a delicate balancing of considerations."

At the moment, the economy looks weaker rather than stronger to Fed officials. Greenspan said the most recent move by the central bank, taken a few weeks ago but not announced, was to supply more cash to the nation's banks and nudge key short-term rates lower because of "indications of some softening in the economy as the year began."

Many financial market analysts thought the Fed had taken the step Greenspan confirmed, but its result was so small -- a drop of about one-quarter of a percentage point in the interest rate banks charge when they lend reserves to each other -- that they could not be sure. Analysts interpreted the Fed chairman's remarks yesterday as indicating no further action to lower interest rates is imminent.

But while economic growth is slowing, Greenspan said the economy should keep growing. "Even now, the economy does not exhibit the geriatric characteristics of the very late stages of a business cycle expansion. You don't have that tightness in the market and inflation accelerating and the types of pressures that usually precede and economic decline," he said.

As usual, the Fed made no single economic forecast. Instead, most of the central bank's six governors and 12 district bank presidents expect that the gross national product will rise between 2 percent and 2 1/2 percent between the fourth quarter of 1987 and the fourth quarter of this year, after adjustment for inflation, Greenspan said. However, the 18 forecasts included predictions of real GNP growth as low as one-half percent and as high as 3 percent.

The forecasts' "central tendency" was toward an inflation rate, as measured by the GNP deflator, of between 3 1/4 percent and 3 3/4 percent over the same four quarters, he said. Most of the Fed officials think there will be little change in the civilian unemployment rate this year, though those who expect very weak growth believe it could go up about a percentage point from its current 5.8 percent level.

In keeping with the high degree of uncertainty in the economic outlook, and the added uncertainty about the relationship between changes in the money supply and the economy, the Fed decided to widen its target ranges for two measures of the money supply and for expansion of debt for 1988. For the most narrow money measure, M1, the Fed again set no target.

Greenspan told the committee that the link between M1 growth and the economy has become so tenuous that a target range for it would have had to be 7 percentage points wide to cover various possibilities, yet all of which would have been consistent with continued economic expansion. M1 includes currency in circulation, checking deposits at financial institutions and travelers checks.

The same concerns led Fed policy makers to set a range of 4 percent to 8 percent growth for the broader money measures, M2 and M3 -- ranges that are 4 percentage points wide rather than 3 as in the past. Last year the M2 and M3 targets were both 5 1/2 percent to 8 1/2 percent. M2 includes all of M1 plus savings and small time deposits and most money market mutual fund shares. M3 includes all of M2 plus large time deposits and other items.

Some Reagan administration officials, including Beryl W. Sprinkel, chairman of the Council of Economic Advisers, have criticized the Fed for allowing money growth to fall below its targets during 1987, which they argued raised the risk of an economic slowdown or recession this year.

Greenspan rejected that criticism yesterday. He said the links between the money supply and the economy have become so tenuous that other indicators also had to be used in analyzing whether monetary policy was on the proper course. "We did not perceive ourselves as being tight," he said.

"We could have controlled the aggregates {the money measures} last year" so that they would have "grown much faster," he declared. "We could not have done so without creating an unnecessarily inflationary environment."

Greenspan said he and Sprinkel have a difference as economists over the meaning of changes in the monetary aggregates. "We certainly do evaluate the 1987 experience differently than he does."

The new money growth target ranges are lower than they were for 1987, but they could nevertheless be consistent with faster money growth than occurred last year. Greenspan said the central bank currently is aiming at the midpoint of the ranges, 6 percent, which if achieved would represent a small increase for M3 and half again as much growth for M2 as in 1987.

"The challenge as we perceived it through much of 1987 was less to buoy money growth than to prevent one-time price rises related to developments in energy and foreign exchange markets from becoming rooted in a renewed inflation process," Greenspan said. He was referring to oil price increases and higher prices for most imported goods caused by the decline in the value of the U.S. dollar on foreign exchange markets.

During questioning by committee members, the Fed chairman said he is "comfortable" with the current value of the dollar on foreign exchange markets. He also said it is much more important for Congress to focus on reducing the federal budget deficit than on reducing the foreign trade deficit, which market forces have begun to trim.


--------------Percent change, 4th qtr. to 4th qtr.------------------

--------------------Actual 1987 --- 1988 Range --- Central ---Admin.

----------------------------------- ------------- Tendency --Forcast

Current dollar GNP--------- 7.2 -------- 4-6.5 -----5.25-6 ----- 6.4

Inflation adjusted GNP----- 3.8 -------- 0.5-3 ----- 2-2.5 ----- 2.4

Prices (GNP deflator)-------3.3 -------- 2.5-4 - 3.25-3.75 ----- 3.9

Civilian unemployment-------5.9 ----- 5.5-6.75 ---- 5.75-6 ----- 5.9

NOTE: The Federal Reserve makes no official forecast. Instead, the six Fed governors and the presidents of its 12 district banks make individual forecasts. The high and low values for the four parts of the forecast are shown under "range." Most of the forecasts are clustered in the "central tendency."