Clinton camp eyes partnership with Fed Strategy to attack deficit would aim for economic growth

January 18, 1993|By Los Angeles Times

Key aides to President-elect Bill Clinton are considering an unusual strategy to attack the budget deficit, in which the Federal Reserve Board would reduce interest rates while the White House pursues a program of spending cuts and tax increases.

Such a coordinated approach would be designed to salvage economic growth, despite the array of anti-deficit measures that otherwise could jeopardize the modest recovery.

"The Federal Reserve has been making veiled hints for years that it might cooperate in such a venture," said a knowledgeable source in the Clinton camp. "The Bush administration never took them up on it."

The focus on a possible role for the Federal Reserve comes as Mr. Clinton's inner circle is heatedly debating economic policy priorities in the final hours before they take the reins of government. Increasingly, expensive campaign spending promises are coming up against severe pressure on Mr. Clinton to combat a widening deficit, projected to exceed $300 billion this year.

A drop in rates could clearly help Mr. Clinton stem the red ink without torpedoing the economy in the process, according to two private analyses recently conducted for Laura D'Andrea Tyson, who will run the White House Council of Economic Advisers.

For example, a decline in short-term interest rates -- of between half a percentage point and a full point -- would help keep the U.S. economy chugging forward, while enabling Mr. Clinton to achieve his deficit-reduction goals through spending cuts and tax increases, concluded the WEFA Group and DRI-McGraw Hill, private economic forecasting concerns that conducted computer simulations for the Clinton team.

The deficit, projected to exceed $300 billion this year, represents a giant barrier to new government spending initiatives, such as those championed by Mr. Clinton during the campaign.

The president-elect has said that he wished to shrink the spending gap by $145 billion annually by the end of his term, and lately has de-emphasized his separate goal of stimulating the economy through extra spending.

Interest rates are the principal tool available to jog the economy if Mr. Clinton chooses to avoid a deficit-widening spending stimulus or tax cuts.

The one-two combination of deficit reduction and lower interest rates would require coordination -- or a tacit understanding -- between the Clinton White House and Federal Reserve, an independent body that sets interest rate policies. The chances of that are unclear.

Fed Chairman Alan Greenspan met with Mr. Clinton in early December, and is rumored to be receptive to helping him attack the deficit. However, key policy decisions at the Fed are made by a 12-member committee, whose willingness to play ball in a cooperative anti-deficit strategy is not known.

The Fed's more fundamental mission is to guard against inflation, which it typically does by raising interest rates as an economic recovery picks up momentum, not by lowering them to accommodate politicians in the executive branch or Congress.

Most analysts see little danger of inflation in the short run, however. While U.S. economic growth moved up into the 3 percent range in the last half of 1992, consumer prices rose just xTC 2.9 percent over the last 12 months, the most tepid increase in six years. Few foresee a sharp upturn in the economy next year.

"Probably if we were going to cut the deficit in half by 1996, the Fed would be on board and willing to massage interest rates down a notch," says Robert F. Wescott, a senior vice president at WEFA, a Philadelphia-area company that submitted a package of budget tables now circulating among Clinton insiders.

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