Election-year cuts in interest rates Greenspan acts: A weak economy and presidential politics are twin factors.

February 02, 1996

GET READY for a series of election-year cuts in interest rates by the Federal Reserve Board. The first came Wednesday. And with the economy weaker than the nation's central bankers expected, there could be more. For President Clinton, who proclaimed the economy is "the healthiest in three decades" during his State of the Union address, lower rates can't come fast enough.

During the 1992 presidential election year, Fed chairman Alan Greenspan dropped the key federal funds rate three times (once by a full half a point) to a near-record low of 3 percent to bolster what he insisted was a recovery, albeit uneven, rather than a recession. It didn't rescue President Bush. This time he has a lot more room to stimulate the economy since even with the latest drop (the third since last July) the fed funds rate is 5 percent.

During quadrennial political crunch periods, Fed policy is judged openly by what is economically necessary and, more quietly, by what is politically imperative. Economists now grant that a recovery lasting to this day began in the year of Mr. Bush's defeat. It was not apparent, however, to a nation then climbing out of a painful recession with unemployment rates at 7.8 percent and growth at a grubby 1 percent.

This time, the economy is indeed in much better shape. The goal is not to rise to 2 percent growth, as it was four years ago, but to keep a steady-as-you-go 3 percent rate from falling to 2 percent. The fed's main concern until mid-1995 was to keep inflation in check -- a goal it rightly claimed had been achieved in justifying its July and December rate cuts. At that time it said not a word about economic weakness.

Then came its latest move, accompanied by what is known as "Fedspeak." The Federal Reserve ascribed its new rate cut partly to what it called "moderating economic expansion" (translation: a raft of disturbing economic results in the past four months).

The question immediately raised in financial circles was whether this would be enough. Because some economic weakness was due to two government shutdowns, the budget impasse and brutal winter weather, the argument could be made that further easing should be resisted. But a more compelling case for further interest rates reductions could be seen in flat Christmas retail sales, drooping consumer confidence, a falloff in the manufacturing sector and what the Fed never officially acknowledges -- presidential politics. Like Supreme Court judges, Fed governors watch the election returns.

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