Newspaper article THE JOURNAL RECORD

Fed Unlikely to Lower Interest Rates

Newspaper article THE JOURNAL RECORD

Fed Unlikely to Lower Interest Rates

Article excerpt


By Leonard Curry San Francisco Chronicle WASHINGTON - Despite White House and congressional contentions that the budget-deficit-reduction plan adopted this weekend will lead to lower interest rates, the Federal Reserve Board is unlikely to change monetary policy.

Throughout the budget negotiations, President Bush and Congress were hopeful that the Fed would expand the money supply to counter the economic stimulus that is being lost to $490 billion in higher taxes and lower federal spending during the next five years.

But Fed officials say the central bank must also consider the value of the dollar against foreign currencies. And a week ago, the dollar plunged to an all-time low against the German mark and an 11 1/2-year low against the Japanese yen.

Although the currency has rebounded slightly from thoe depressed levels, the fact remains that the Federal Reserve would have difficulty in justifying any reduction in interest rates that would further weaken the dollar against other currencies.

In fact, some voices at the Fed are calling for a tighter monetary policy to raise interest rates and strengthen the dollar.

Contrary to the goals of the president and Congress, which have been concentrating on fiscal policy and the budget deficit, the Fed has based its monetary decisions on fighting inflation.

In interviews, sources say Federal Reserve Board Chairman Alan Greenspan is concerned that the declining dollar and the surge in oil prices that ensued after the Iraqi invasion of Kuwait will unleash another round of debilitating inflation in the U.S. economy and undermine the best intentions of the deficit reduction plan.

The twin ills of inflation and recession would seriously widen the gulf between federal income and outlays.

Consequently, Greenspan is more concerned with ratcheting inflation down from its present plateau of about 4.5 percent to about 3.5 percent next year, and ultimately to 1 percent - a level that has not been reached seen since the first term of the Nixon administration. …

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