Fed Expected to Go on Collision Course With White House

Policy-makers at the Federal Reserve, meeting this week to map monetary strategy for the year, probably will set the central bank on a collision course with the new Administration and call into question the underlying tenets of President Bush’s budget, private economists said today.

These analysts predicted that the Fed will drive a variety of interest rates, including mortgage rates and banks’ prime lending rate, higher in coming months in an effort to slow the economy to a more sustainable pace of growth.

Those actions will run counter to the hopes of the Bush Administration, which is looking for falling interest rates and robust economic growth to boost government revenues and make it easier to trim the budget deficit without breaking Bush’s no-new-taxes pledge.

Federal policy-makers will meet behind closed doors Tuesday and Wednesday to review policy and set monetary growth targets for 1989.

Private economists are widely predicting that the Fed will continue pushing interest rates higher because of fears that the economy is still growing too rapidly to keep inflation under control.

For Bush, action by the Fed to boost interest rates further to slow the economy would spell trouble for his budget plan, which he will unveil in a congressional address Thursday. The new Administration has said it will base its budget on the same optimistic economic assumptions employed in then-President Reagan’s final budget last month.

The White House is projecting robust economic growth of 3.2%, as measured by the gross national product, and short-term interest rates averaging 6.3% for 1989.

However, Fed credit-tightening has already pushed interest rates 2 percentage points higher than the Administration’s estimate, and Fed officials are looking for slower growth of between 2% and 2.5% to check inflation.

“Everybody knows the Administration’s economic forecast can’t work,” said Michael Evans, head of a Washington forecasting firm. “Greenspan is running the economy and Bush isn’t.”