Economic panel asks Fed to keep interest rates low Aid deficit-reduction program, it urges

April 02, 1993|By Gilbert A. Lewthwaite | Gilbert A. Lewthwaite,Washington Bureau

WASHINGTON -- With the economic recovery only sputtering along, the congressional Joint Economic Committee called on the Federal Reserve yesterday to "cooperate" with the Clinton deficit-reduction plan by keeping interests rates low.

Fearful that the proposed $496 billion in tax increases and spending cuts over the next five years could hamper growth, the committee said in its annual report on the economy that "the primary responsibility for ensuring an economic recovery rests with the Federal Reserve."

The central bank's chairman, Alan Greenspan, had been measuredly supportive of the Clinton plan and mildly reassuring about recovery prospects, but, as usual, he has not committed himself to any firm stance on interest rates.

FTC The Fed's policy-making Open Market Committee at its February meeting noted that inflation -- a key factor in its decision on whether to tighten monetary policy and increase interest rates -- remained "quite subdued," and was likely "to moderate further in coming quarters."

But its minutes, published last week, also revealed: "A few [members of the committee] referred to the recent firming in some commodity prices and the consensus among private forecasters that inflation could drift higher over the next few years." One member actually suggested the consideration of higher rates.

Sen. Paul S. Sarbanes, the Maryland Democrat who is vice chairman of the Joint Economic Committee, said such concerns about inflation were unnecessary.

"We have a lot of room for growth without it having an impact on inflation," Mr. Sarbanes said.

"Right now we have a very good inflation performance, and the Fed has to provide the monetary policy that contributes to jobs and economic growth. There is no basis whatever for tightening monetary policy. I would be prepared to see a further easing of monetary policy."

The congressional committee noted that during the late 1980s, the Fed raised short-term interest rates to 9.85 percent in an effort to produce a "soft landing" for an economy that was expanding so rapidly it Threatened to unleash high inflation.

"Rather than a 'soft' landing, the economy actually experienced the 'hard' landing that typically occurs with the Fed tightening [monetary policy] to squelch inflation," the report said.

The Democrat-controlled committee said the Clinton stimulus package, a $16.3 billion injection of public works projects, income support and investment incentives, was vital to offset the inevitable depressant effect of the proposed tax increases and spending cuts.

Without the package, the economy would contract by 0.8 percent of gross domestic product, the nation's total output of goods and services, in fiscal 1994, the panel said.

Committee Chairman Rep. David R. Obey, a Wisconsin Democrat, said the Clinton administration's "gamble" in seeking to reduce the deficit while the recovery was so anemic had to be managed "very delicately, very carefully" and was dependent on "the correct response" by the Federal Reserve and the financial markets in New York.

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