The Fed for the Long Haul

August 18, 1994

Sen. Paul S. Sarbanes reacted predictably -- i.e. negatively -- to the latest increase in short-term interest rates ordered by a unanimous Federal Reserve Board acting, for the first time, with two Clinton appointees aboard. "I think it's bad for the economy," the Maryland Democrat declared, "and if it's bad for the economy it's bad for elected officials." Mr. Sarbanes is a three-term-senator seeking a fourth six-year term in November.

Of course, the senator is right. No "elected official," especially one involved in a political campaign, is going to go around stumping for higher interest rates. That's a grisly chore better left to appointed officials with lengthy fixed terms that give them immunity from partisan, popular and special-interest pressures. Yet even though Mr. Sarbanes has now made it all too clear how "elected officials" will respond to Fed interest-rate decisions, he is in the forefront of a fierce crusade to give these politicians more influence over the traditionally independent central bank.

This week's half-point rise in the federal funds and discount rates will inevitably be linked with the name of Fed chairman Alan Greenspan, who since February has nudged up interest costs five times in a "preemptive strike" against inflation. Yet what really distinguishes the newest increase is that it drew the support of Alan S. Blinder and Janet Yellen, the first Democratic nominees to the Reagan-Bush dominated Fed since the Carter era.

During a meeting with The Sun's editorial board last Spring, Senator Sarbanes expressed fervent support for the prospect of Mr. Blinder's selection -- suggesting his voice would offset some of the power of the inflation hawks on the Fed.

Perhaps the two new board members were trying to show they are team players. But before Mr. Blinder became Fed vice chairman, he was a member of President Clinton's Council of Economic Advisers. And the leader of that council, Laura Tyson, joined with Treasury Secretary Lloyd Bentsen in support of the Fed's controversial policies.

"Given the strong gains in output and employment so far this year, we need to be watchful for signs of developing price pressures," the Bentsen-Tyson statement declared. "Based on the most recent available evidence about the economy's growth [currently more than 3 percent] and price trends [currently 2.9 percent], the administration sees no reason to adjust its forecast at this time." Translation: The administration, which has bravely refused to indulge in Fed-bashing, believes the economy will remain on track, as it has during the whole period of increasing short-term rates.

The bottom line must be the long-term health of an economy that still responds to government manipulation. If Senator Sarbanes has his eye on the outlook for 1994, President Clinton's preoccupation is with making the good times roll right through his relection year, 1996.

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