Newspaper article THE JOURNAL RECORD

Economists Split on Impact of Political Pressure on Fed

Newspaper article THE JOURNAL RECORD

Economists Split on Impact of Political Pressure on Fed

Article excerpt

Associated Press

WASHINGTON _ Economists agree Federal Reserve policymakers are under intense political pressure this year to keep interest rates low. But they differ over just how sensitive the supposedly independent central bank has been to President Bush's desire to be reected.

Economist David M. Jones of Aubrey G. Lanston Co., a government securities dealer in New York, said Wednesday "the Fed's actions in 1992. . .seem to have been shaped largely by electionar pressures."

But economist Michael Moran of Daiwa Securities America said "pressure from the administration or Congress has not influenced policy unduly."

The two testified, along with professors from Duke University and the University of California at San Diego, before the House Banking subcommittee on domestic monetary policy.

The Fed, created in 1913, is supposed to operate independently, restraining inflation even when elected politicians would opt for excessive interest rate cuts, thus boosting the economy temporarily at the expense of inflation later.

The Fed's latest move to reinvigorate the flagging economy came last week, when it cut its discount rate _ the interest it charges on loans to banks _ by a half percentage point to 3 percent, a 29-year low.

In the week preceding the reduction, President Bush had called for lower rates in newspaper and television interviews.

That's nothing new. According to Jones, "Federal Reserve policymakers operate in a vast sea of political pressures."

The Bush and Reagan administrations have kept a steady pressure on since early 1988, he said, but it was not evident the Fed responded to the pressure in 1988, 1989 or 1990.

Last year, political pressure "appeared to have a greater influence on Fed actions," although it "merely reinforced" the direction the central bank was taking anyway in response to the recession, Jones said.

Now, he said, the Fed appears so politicized it is harming its credibility as an inflation fighter.

Even if that's not true, the perception is hurting the economy by keeping upward pressure on longrm interest rates, said Rep. …

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