Interest Rates Peril Fed Chief’s Job, Sources Say

President Bush is so upset over Federal Reserve Board Chairman Alan Greenspan’s refusal to push interest rates down further that he is unlikely to reappoint him as Fed chairman when his term expires in August of 1991, sources said Thursday.

Although White House Press Secretary Marlin Fitzwater denied it, a longtime Bush adviser said the President was “mad as hell” about Greenspan’s position. The source implied that he would seek a new Fed chief when Greenspan’s current term is over.

“I can’t believe he will reappoint him and I don’t know a soul in the White House who thinks he will,” said the adviser.

Fitzwater said the matter of Greenspan’s reappointment had not been discussed in the White House.

The sources, who asked not to be identified, offered a different interpretation of Bush’s feelings. And they said that, although Greenspan’s future may not have been discussed in any formal way, the prevailing White House sentiment made his reappointment improbable unless Fed policy in the next 17 months moves in the direction the White House prefers.

Over the past few months, Administration officials have criticized the Fed on several occasions for keeping interest rates too high. But this is the first time that anyone close to Bush has suggested that the President is so agitated over the issue that Greenspan’s reappointment is unlikely.

Fitzwater acknowledged in an interview that Bush differed with Greenspan’s tight money policy. When told that sources had said Bush was so upset with Greenspan that he would probably not reappoint him as chairman, Fitzwater said: “I don’t think he’s nearly that upset. Let me check and call you back in five minutes.”

Fitzwater called back and said he had checked with White House Chief of Staff John H. Sununu and Michael J. Boskin, chairman of the Council of Economic Advisers.

“They say the President has the highest respect for Greenspan and likes him and has worked with him closely over the years and has included him in meetings,” he said. “And it’s just not the case there’s any anger. Reappointment hasn’t been discussed and he’s not up for a year and a half.”

Fitzwater said he had never seen Bush express any anger over Greenspan’s policy. “The only one I’ve seen angry,” he said, is Budget Director Richard G. Darman.

Last August, Darman said in a television interview that if the country fell into a recession, it would be because the central bank “erred on the side of caution. “

Darman subsequently explained that he had not meant to be so blunt, and he has not spoken out publicly since. Although a top OMB official said he had heard no discussion of Greenspan’s future, Darman is known to feel strongly about the issue and has continued to discuss it in Administration circles.

Greenspan could not be reached Thursday for comment.

Republican sources say many economists think Greenspan’s monetary policy has been too tight in the face of recent weaknesses in the economy and agree that his differences with the Administration mean he is unlikely to be reappointed.

These economists, a former high-level Republican official said, think Greenspan “is too academic and too theoretical about zero-based inflation for the real world.” This view holds that Greenspan should have been lowering interest rates in the face of “durable goods (orders) dropping and other economic statistics not looking good.”

Greenspan told Congress just two weeks ago that the economy has probably passed the point where recession is a serious threat. With the danger of recession fading, the Fed chairman indicated that he was unlikely to encourage interest rates to fall because of the risk that the move might push inflation higher.

And on Jan. 30, Greenspan dismissed lawmakers’ suggestions that there might be a rift between him and the Administration. A week and a half earlier, Fitzwater had asserted that a further easing of interest rates would be justified.

Ironically, the Bush team’s repeated criticism of the Fed has served to unsettle financial markets, which apparently want the Fed to continue keeping a tight grip on the monetary reins to help guard against a further speedup in inflation.

The Fed began last June to reduce interest rates gradually. But when it moved in December to ease credit another notch, the central bank ran into a backlash in the financial markets. Investors interpreted the step as a signal that Greenspan was going too far in abandoning the fight against inflation.

As a result of the market reaction, the central bank quickly halted any further moves toward lower interest rates.

The flap between Bush and Greenspan is by no means the first time that administrations and the Federal Reserve have been at odds over interest rates.

President Ronald Reagan’s first Treasury Secretary, Donald T. Regan, never forgave Greenspan’s predecessor, Paul A. Volcker, for following tight money policies that Regan blamed for the 1981-82 recession. Under pressure from Wall Street, Reagan reappointed Volcker to another term as Fed chairman in 1983. But when Regan became his chief of staff, Reagan replaced Volcker with Greenspan in 1987.

Volcker was also in trouble with Democratic President Jimmy Carter, who was forced to appoint him in the first place in 1979 after Carter’s own economic policies failed and inflation soared to more than 12%.

And in the early 1970s, the late Fed Chairman Arthur F. Burns clashed with the White House of Richard M. Nixon, even though he had been a top Nixon economic adviser before joining the Fed.

As in the case of Volcker and Burns, however, Greenspan is popular with Congress, which seems pleased with his performance. Senate Banking Committee Chairman Donald W. Riegle Jr. (D-Mich.) told Greenspan recently: “The job is in the best possible hands.”

Once the top economic adviser to former President Gerald R. Ford, Greenspan, 64, is a mainstream Republican who is known as a conservative and well-informed economist and essentially a team player.

Though technically a creature of Congress, the Fed’s seven-member board of governors is almost entirely independent of any other part of government, precisely so that it can serve as a counterbalance to the Administration and Congress.

Greenspan took office as Fed chairman on Aug. 11, 1987. His term as chairman expires in August, 1991, but he is entitled to remain on the board as an ordinary governor until Jan. 31, 1992.

Staff writers Art Pine and Tom Redburn contributed to this story.