Relax Monetary Policy, Darman Urges the Fed : Sending Signal From Administration, Budget Director Says He Favors Lower Interest Rates

White House budget director Richard G. Darman, sending a strong signal from the Bush Administration to the Federal Reserve Board, called Sunday for lower interest rates and a looser monetary policy to stimulate economic growth.

Speaking on NBC’s “Meet the Press,” Darman urged the independent Fed to “be more attentive to the need to avoid tipping the economy into a recession.” He said that the Fed would have to bear responsibility for a recession if one occurs.

“I’m fearful . . . that they may have been a little bit too tight,” Darman said. “If we do have a recession, I think it will be because they erred on the side of caution.”

‘Fair Conclusion’

Asked if he would like to see lower interest rates, Darman said: “That would be a fair conclusion.” There is no reason for a recession, he said, “if there’s sensible management on the part of ourselves and the Fed.”

The Fed, concerned about mounting inflation, had engineered a substantial rise in interest rates beginning early in 1988.

But about two months ago, the Fed began letting rates decline. Fed Chairman Alan Greenspan, as if to reassure the Bush Administration, told Congress in July that he would move quickly to avert an “unnecessary and destructive recession.”

Many economists believe that the Fed is deftly walking the line between inflation and a recession.

“It looks like the Fed is succeeding in what they are trying to do, which is reducing inflationary pressures without throwing us into a recession,” said Donald Ratajczak, an inflation specialist at Georgia State University. He warned that inflation might reaccelerate if the Fed heeds Darman’s request for lower interest rates.

David Wyss, a chief economist at Data Resources Inc., a consulting firm in Lexington, Mass., added: “I think the Fed is bringing interest rates down in time to avoid a recession. But it’s going to be a close call.”

Both economists interpreted Darman’s public criticism of the Fed’s policy as an attempt to influence the independent board before the Federal Open Market Committee, which sets monetary policy for the Fed, meets later this month.

The Fed has been attempting to slow the economy in hopes of creating a “soft landing” in which inflationary pressures decrease without a recession.

Until this spring, inflation had been paramount on the Fed’s mind. For the 12 months ending in April, the Fed engineered an increase in the “federal funds rate”--the rate banks charge each other for overnight loans--from about 6.5% to 10%. Other interest rates followed in step, and the yield on three-month Treasury bills rose from less than 6% to nearly 9% during that period.

Then the Fed, apparently satisfied that inflationary pressures had been curbed, began worrying about slowing the economy too abruptly. It let the federal funds rate fall back to 9%, and the rate on three-month Treasury bills has slipped back below 8%.

Greater Risk

In his testimony to Congress last month, Greenspan abandoned his previous posture that inflation posed a greater risk than recession. But sounding a note of caution, he also hinted that he would not permit a significant further drop in interest rates unless the economy weakens markedly.

As far as Darman is concerned, that apparently was not a strong enough signal. Ratajczak said that Darman’s public message to Greenspan means that Administration officials “haven’t won their point, and they’re trying to put some pressures to bear.”

“There are ways to communicate with the Fed without having to do so in public,” Ratajczak said. He noted that Greenspan and Michael J. Boskin, head of Bush’s Council of Economic Advisers, frequently meet privately.

Wyss, who worked for the Fed for seven years, said that it is “traditional” for an Administration to try to influence the Fed’s policy. Administrations have “always pushed for a looser economic policy, especially when the economy is slowing down,” he added.

“I don’t think there’s anything wrong,” Wyss said, “as long as the Administration doesn’t get too heavy-handed about it.”

Some administrations cross the line when they pressure the Fed, he said, “but I don’t think this one has at this point.”