Soft Landing for the Economy

July 20, 1995

Federal Reserve chairman Alan Greenspan's upbeat assessment of the economy for election year 1996 contains cautiously good news for both Democrats and Republicans and should bolster his own prospects for re-appointment as manager of the nation's monetary policy.

In his semi-annual report to Congress, Mr. Greenspan repeated his warnings of a mild recession that preceded his turn-around to lower interest rates, but this was just prudent hedging as he looked optimistically ahead.

His forecast was for 2.25 to 2.75 percent growth in 1996 as the economy recovers from a slack first half to record an annual increase of 1.5 to 2 percent this year. What a prescription for an ideal "soft landing"! No wonder the U.S. central banker was impelled to give himself good marks for doubling short-term rates between early 1994 and mid-1995 before lowering them a quarter point two weeks ago. He suggested this blocked a run-up in inflation and an over-heating of the economy that could have caused a hard landing.

While Wall Street was too preoccupied by tumbling technology stock prices to wait with its usual breathlessness on Mr. Greenspan's words, his comments will be parsed carefully for hints of further cuts in the federal funds rate and, possibly, an initial reduction in the discount rate watched closely overseas. The Fed chairman predicted even lower inflation next year -- around 3 percent -- than the 3.25 rate that now prevails. Because he views inflation-fighting as his primary mandate, he may now be inclined to allow a further easing in monetary policy in the near term.

Such a course would be pleasing to President Clinton, who ignored many liberal Democrats by giving tacit support to Mr. Greenspan's crucial decision to go for higher short-term rates last year. Only in recent months has the White House grown restive as the president's gurus worried their boss could suffer George Bush's fate if the economy turns sour. "It's the economy, stupid," remains the mantra of the Clinton administration.

Yet Mr. Greenspan is a Republican, and an old-fashioned conservative, too. His comment that GOP efforts to balance the budget by 2002 don't not pose an undue risk to the economy should reassure Republicans who fear their spending cuts would be blamed for any downturn. They, too, have absorbed the lesson of the 1992 campaign.

Overall, Mr. Greenspan's assessment of the economy constituted an appeal for reappointment next year. His policies have benefited the country, which means they have benefited the Democrat in the White House. If Mr. Clinton were to opt for a new Fed chairman, he would have a devil of a time gaining confirmation in the Republican-controlled Senate. By the same token, GOP legislators will be pleased by the chairman's blessing of their balanced-budget drive. Clearly, Mr. Greenspan remains near the pinnacle of power in Washington, which is right where he belongs.

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