• U.S.

The Fed Feels the Heat

3 minute read
Richard Hornik/Washington

Treasury Secretary James Baker likes to tell audiences that in a presidential election year there are three main issues: “The economy, the economy and the economy.” Privately, he lets friends know that instead of again taking the job he had in 1980 as campaign manager for George Bush, he decided that “I can do more good for him right here by keeping this economy going.” And how does he plan to do that? By putting pressure on the Federal Reserve, critics of the Administration say, to expand the money supply and reduce interest rates. As the campaign heats up, the Democrats have begun complaining that Baker and other White House policymakers are trying to play politics with the economy.

That issue was at the top of the agenda last week, when Federal Reserve Chairman Alan Greenspan appeared on Capitol Hill to give his semiannual report on monetary policy. In a hearing before the Senate Banking Committee, Wisconsin Democrat William Proxmire, the panel’s chairman, opened the proceedings with the statement that he was “troubled by the extent of the political pressure being put on the Fed by the Reagan Administration in this presidential election year.” When questioned about such pressure, Greenspan acknowledged that he and other Fed officials had received a letter in January from Michael Darby, the chief economist on Baker’s Treasury staff. Darby argued that the Fed was being too restrictive with the money supply and should loosen up to avoid a recession. Greenspan testified that he had “objected quite strongly” to the letter and had called the White House to complain that it was improper.

Proxmire also cited criticism of the Fed in the Economic Report of the – President issued two weeks ago, which was prepared under the direction of Beryl Sprinkel, chairman of the Council of Economic Advisers. The report contends that overly tight Fed policies resulting in a rise in interest rates last year were partly responsible for the October stock-market crash.

As controversy swirled around the alleged pressure on the Fed, Baker kept quiet. Privately, though, Administration aides were appalled that the issue had flared up. Whether or not Baker agreed with Darby’s views, the Secretary apparently had not authorized the economist’s letter and was annoyed at the ham-fisted effort to influence the Fed. Baker reportedly told Darby that he was out of line.

Before Congress, Greenspan admitted that the Fed had recently eased its policy and allowed interest rates to fall a bit. But he explained that it was concern about the sluggish economic outlook, not political pressure, that had spurred the Fed. That concern faded slightly in the wake of somewhat encouraging economic statistics. The Department of Commerce reported last week that the gross national product grew at a real annual rate of 4.5% during the fourth quarter of 1987, a somewhat higher figure than the previous estimate of 4.2%. Though Greenspan expects growth to slow down this year, he sees no need — for the moment at least — to reduce interest rates further, which might rekindle inflation. For now, price increases seem under control. The Consumer Price Index rose at a 4.2% annual rate in January, down slightly from the 4.4% pace for all of 1987.

Greenspan insisted that he was no soft touch for the White House. Said he: “I myself am not particularly concerned that we will be unduly influenced by the Administration.” The bigger danger, he said, was that the Fed might bend over backward to appear independent and err on the side of being too stingy with the money supply.

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