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Bush Warns Fed Against Raising Rates

Times Staff Writer

President Bush, firing a warning shot across the bow of the Federal Reserve Board, said Wednesday he believes the economy is “reasonably stable” and hopes the Fed will not “overreact” to inflation fears by driving interest rates up further.

“I don’t want to see us move so strongly against fear of inflation that we impede growth,” Bush said in an interview with reporters in the Oval Office. “We have to keep expanding opportunities for the working men and women of this country.”

Play Down Differences

Although White House officials tried to play down any differences, the President’s comments suggested a possible clash between the White House and the Fed as the independent central bank begins to move more vigorously to dampen inflation.

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Fed Chairman Alan Greenspan told Congress Tuesday that the Fed plans to keep interest rates high to help curb inflation, and he hinted that rates may go even higher if the economy does not begin to slow. He warned that a further large drop in unemployment would increase wage pressures, aggravating inflation.

And a new compilation by the Fed of regional economic assessments cautioned Wednesday that the economy has “gained momentum” in recent weeks, adding to steadily mounting inflationary pressures.

The report, used by the Fed to determine whether to tighten money and credit, said consumer spending continued strong virtually throughout the economy even as manufacturing output rose briskly and labor became increasingly scarce.

Greenspan told Congress that “current inflation rates . . . clearly are too high and must be brought down.” That, he said, “will require a slowing in domestic demand"--either by reducing the budget deficit or pushing interest rates up.

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Greenspan said the economy could grow no more rapidly than 2.5% to 3% a year without reigniting inflation. The Bush Administration, by contrast, is forecasting economic growth of greater than 3% for each of the next four years.

Hints at Flexibility

Fed Vice Chairman Manuel Johnson said Wednesday the Fed is not determined to achieve the 2.5% goal “at all costs” but he did not contradict Greenspan’s warnings that interest rates might go higher if the economy continued strong.

Likewise, Greenspan cautioned that any further decline in the unemployment rate, now 5.3%, would put upward pressure on wages. The Administration forecasts the unemployment rate to fall to 5% by 1991.

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The Fed has been tightening credit gradually over the last 11 months since fears of renewed inflation began to emerge. Short-term interest rates now are about 2.5 percentage points higher than at this time last year.

Bush said in the interview Wednesday that he had not yet read Greenspan’s comments fully but he noted approvingly that the financial markets “have been saying that things are reasonably stable” and saw “no signals out there . . . that this economy is in real trouble.”

At that point, White House Press Secretary Marlin Fitzwater, who was present during the interview, remarked: “I think his (Greenspan’s) comments are a lot closer to our position than was reported, too.”

“That’s what I was told,” Bush agreed.

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However, Greenspan said he was determined to keep Fed policy “fundamentally . . . centered on moving toward, and ultimately reaching, stable prices.”

“I hear all too frequently that current rates of inflation are acceptable to the Federal Reserve,” he said. Actually, he asserted later: “Current inflation rates . . . clearly are too high and must be brought down.”

Despite the seeming differences between Bush and Greenspan, the stock market continued to climb on Wednesday. The Dow Jones industrial average, which had soared 38.04 points on Tuesday, rose another 9.46 points Wednesday, to 2,265.89, its high since the crash of Oct. 19, 1987.


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