The Clinton-Greenspan Axis

April 20, 1994

Liberal economists may fret and liberal Democrats may flail, but the Clinton administration continues its remarkable if understated support for Federal Reserve Board increases in short-term interest rates.

Not one word of criticism has come from the president despite fears within his political party that clamps on the booming economy could hurt its prospects in November's elections. Instead, Mr. Clinton has suggested that concurrent increases in long-term rates beyond the Fed's reach are unjustified in light of the central bank's pre-emptive strike against scarcely visible inflation pressures.

Treasury Secretary Lloyd Bentsen even seemed to flash a green light for the latest quarter-point rise in short-term rates -- the third in three months -- when he forecast "approximately a 4 percent rate by the end of the year." The Fed promptly boosted the rate banks charge banks for overnight loans to 3 3/4 , and another quarter point rise is anticipated next month.

The battlefield lies beyond. If the Fed were to hike rates to 4 1/2 percent, the administration might well protest that such levels could choke off what is today a healthy economy. This is not the intention of Fed chairman Alan Greenspan, ever in pursuit of an elusive "neutral" position in which growth of about 3 percent is nicely balanced against inflation in the same range. But what is one person's "neutrality" is another person's excess.

Maryland Sen. Paul S. Sarbanes complained that "as the economy comes up for air, the Fed shoves it back down." That, however, is not the verdict of market speculators. Suspecting that the Fed foresees higher inflation than it acknowledges, they have pushed long-term rates a full percent point above what they were when this whole process began Feb. 4. Under the Greenspan theory, the opposite should be happening once it establishes the credibility of its inflation-fighting zeal.

Both categories of Fed critics can't be right. Either the Fed is too austere, as Mr. Sarbanes would argue, or its quarter-point nudges have not been convincing, as market behavior would indicate. The latter proposition seems more persuasive. The sooner the Fed reaches a stable short-term level the sooner the markets will calm down.

Though the bears are running on Wall Street, all is bullish in the real world of goods and services. Housing starts may not jump by double digits, but they will be up around 8 percent over last year. Auto sales remain hot and business investment is strong. Despite -- or because of -- Federal Reserve policies, there is scant prospect the economy will slump or stagnate in the present interest-rate environment.

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