Bush Administration Turns Up Heat on Federal Reserve

Article excerpt

George Bush and his spokesman last week broke his administration's policy of keeping quiet about the policies of the Federal Reserve.

But the statements of the president and his press secretary, Marlin Fitzwater, about the need for lower interest rates were mild compared to the sharp attacks on the Fed by officials in previous administrations when the economy was flagging in an election year.

At the week's end, senior administration officials said the Bush and Fitzwater remarks were not meant as a direct challenge to the central bank but as a reminder that the Bush administration wants interest rates as low as is possible, consistent with restraining inflation.

Although the Fed has allowed interest rates to fall somewhat in the last seven months, they remain abnormally high compared with the rate of inflation.

Until last week, the central bank had received unusually little criticism from the White House and Congress as an election year begins, given the weakness of the economy and the fact that interest rates are unusually high by historical standards.

Three-month Treasury bills are paying about 7.75 percent and 30-year Treasury bonds are around 8.25 percent, while the inflation rate has held steady for years at about 4.5 percent.

The reluctance of politicians to take on the Fed is in large part a result of the high regard they have for Alan Greenspan, the chairman of the Federal Reserve Board, and of their hope that Greenspan and his colleagues can perform the extraordinarily delicate feat of slowing the economy enough to avert high inflation without causing a recession.

The relative absence of criticism also reflects the acknowledgement in the White House and Congress that elected officials have let the budget deficit get out of hand and, for better or worse, have surrendered economic policy to the central bank.

Even legislators from states and districts that for all intents and purposes are in a recession say they are under no pressure from constituents or interest groups to take on the Fed.

The view of the Federal Reserve governors and top staff members is that a lack of political arm-twisting gives them freedom to fine-tune the economy that they would not otherwise enjoy.

But, gun-shy from past experience, they fear the statements by Bush and Fitzwater are the first signs that the truce flags are coming down.

In his first public statement on the matter in almost a year, Bush told the National Association of Homebuilders in Atlanta on Friday that ``low and stable interest rates'' were essential to a growing economy.

He did not specifically mention the Federal Reserve.

The day before, Fitzwater said the administration hoped that new statistics showing a steady inflation rate and a faltering housing industry would persuade the Fed to loosen credit.

Some politicians suggested that Fitzwater's remarks laid the groundwork for the administration to shift blame to the Fed if the economy slides into a recession.

But top administration officials disputed that view.

One observed that Greenspan resented political pressure and would be less likely to loosen the reins on credit if the administration kept speaking out.

In any case, the mood now is quite different from that in 1980 and 1982, the last time the economy was weak in an election year.

In 1980, a repeated theme of Pres. Jimmy Carter's re-election campaign was his attacks on the Federal Reserve for its ``ill-advised'' policy of raising interest rates to retard inflation.

Similarly, in early 1982, Pres. Ronald Reagan blamed the Fed for a monetary policy that caused capital investment to decline.

Speaking of interest rates as the mid-term election drew near, Reagan told an audience:

``If that string hadn't been pulled for so long and so hard, we might not have had the depth of the recession that we've had. …