NEW YORK (CNN/Money) -
The Federal Reserve will keep interest rates low and may even cut them further, Alan Greenspan told Congress Tuesday, but the central bank chairman also said the Fed was not ready to take unusual steps such as buying Treasury bonds to give a lift to the economy.
"With the target funds rate at 1 percent, substantial further conventional easings could be implemented if [Fed policy makers] judged such policy actions warranted," Greenspan said in remarks to the House Financial Services Committee.
"The FOMC stands prepared to maintain a highly accommodative stance of policy for as long as needed to promote satisfactory economic performance," he said, referring to the Fed's policy-making body, the Federal Open Market Committee.
In response to questions from members of the committee, Greenspan said he does not agree with those who believe that the federal funds rate could not easily go below 0.75 percent. The overnight bank lending rate -- the Fed's main tool for influencing rates and the economy -- stands at 1 percent, the lowest since 1958.
Greenspan said if the Fed doesn't find it is getting the impact from further rate cuts, then it is prepared to take non-traditional steps such as buying up Treasury bonds.
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 CNNfn's Kathleen Hays reports on Alan Greenspan's testimony and the possibility of further interest rate cuts.
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"If it's necessary, we will do it," he said. "It's clear to us there is a downside limit [to rate cuts] – zero being the ultimate lower bound." But he said he believed that time for that action was not yet here.
"Given the now highly stimulative stance of monetary and fiscal policy and well-anchored inflation expectations, the committee concluded that economic fundamentals are such that situations requiring special policy actions are most unlikely to arise," he said in his opening remarks.
On Wall Street, Treasury bond prices tumbled on Greenspan's comments, which disappointed investors who had been hoping the Fed might step in and buy bonds in a bid to drive long-term rates lower. Bond prices and yields move in opposite directions. Stock prices fell.
"The markets were holding out some misguided hopes that Greenspan would try to talk up bond prices. He didn't come anywhere close to that," said Dana Johnson, head of research for Bank One Capital Markets.
Greenspan's comments should be taken as an encouraging sign by investors looking for a turnaround in the economy, said Anthony Chan, chief economist at Bank One Investment Advisors.
"Greenspan essentially is telling financial markets to 'bring it on' by implying that the Fed is prepared to keep monetary policy in an accommodative mode for as long as it takes to get the job done," Chan said.
To read highlights of Greenspan's comments, click here.
The Fed cut its target for the fed funds rate when the central bank's policy makers met June 25 -- the 13th cut since the start of 2001 as the central bank has tried to help the world's largest economy fight off the effects of a recession, terrorist attacks, corporate scandals, war and more.
While some question whether further rate cuts would be effective, Greenspan said the central bank has studied the issue and decided that they would. But he also conceded that low rates so far have not lifted business activity as much as they might have in the past.
"A pervasive sense of caution reflecting, in part, the aftermath of corporate governance scandals, appears to have left businesses focused on strengthening their balance sheets and, to date, reluctant to ramp up significantly their hiring and spending," he told lawmakers.
"As yet there is little evidence that the more accommodative financial environment has materially improved the willingness of top executives to increase capital investment," he said in his opening remarks.
Greenspan spoke on the same day that the White House acknowledged that the budget deficit could hit a record $455 billion this fiscal year.
Massachusetts Democrat Barney Frank read a passage from a report from Greenspan that said that the deficit would restrict access to capital needed by businesses. But Frank could not get Greenspan to answer a question as to how may years of budget deficits at this year's level were sustainable. Greenspan said the question could not be answered without knowing many other variables.
Greenspan's warnings in February about the problems that tax cuts could have on the budget were seized on by opponents of the White House tax-cut proposal at that time.
But Tuesday Greenspan said he doesn't oppose tax cuts as long as there are new limits on federal spending. He also said that tax cuts could help stimulate both the economy and employment, points that are far more in synch with White House policy than his February presentation.
Still, while Greenspan said he believed the tax cuts would help the economy, he disputed arguments by tax-cut advocates who believe the resulting economic growth would actually raise federal tax collections rather than boosting the deficit.
"Is there a tax cut that pays for itself? I doubt it," he said.
Greenspan also received criticism from some members of the committee, particularly Bernie Sanders, an independent from Vermont, for his comments that the ongoing loss of manufacturing jobs was not in itself a threat to the economy -- as long as the United States continued to have access to imports and could produce services as valuable as the products formerly made by U.S. manufacturers.
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