Clinton and Fed battle over rates

December 20, 1993|By New York Times News Service

It was sweet for 11 months, but the honeymoon between President Clinton and the Federal Reserve has finally come to an end.

The beginning of the end came with bickering over the president's proposal to have just one agency regulate the nation's banks, a move that would take away some of the Federal Reserve's power. And now it seems Mr. Clinton could sue for divorce if the central bank raises interest rates early next year to fight inflation, as some rumblings from within the Fed suggest.

The Clinton administration is delighted that the economy has finally started to advance, and the last thing it wants is for the Fed to slow it down by raising rates. But administration officials cannot hide their fears that the Federal Reserve will raise rates to make sure that inflation does not surge.

"The real question is not whether interest rates go up, but when and how much," said Frank Newman, undersecretary of the Treasury for domestic finance.

Last week Mr. Clinton was so worried that the Fed might sabotage his promise of stronger growth that he engaged in some unusually outspoken jawboning, saying, "There's no indication that we're facing a return of inflation."

He added that until the economy produced "some real threat of inflation it would be inappropriate for us to choke off an economy that has already had a false start or two" since the 1990-91 recession ended.

Treasury Secretary Lloyd Bentsen joined the jawboning yesterday by saying that with the economy growing at a 3 percent annual rate and inflation low, he saw no need for the Fed to push up interest rates.

"I don't see it in the current quarter or the next quarter," Mr. Bentsen said on the NBC News program "Meet the Press."

In recent interviews and speeches, Federal Reserve officials indicated that they would not approve an immediate rate increase when the central bank's main policy-making committee met tomorrow.

But these officials signaled that they might push to raise rates before long in response to the recent surge in economic growth.

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