Fed Spurns Bush Demand for Cut in Interest Rates

President Bush called on the Federal Reserve Monday to push interest rates down in recognition of the new federal budget agreement, but officials at the central bank signaled that it is unlikely to do so in the foreseeable future.

Bush portrayed the new budget accord as part of a pact between the Administration and the Fed and, in effect, demanded that the Fed live up to its part of the bargain, telling reporters at a news conference in New York: “I would look to the Federal Reserve to lower the rates.”

The President’s remarks reflected a belief, widely held in New York and Washington, that the Fed would push interest rates down if a budget accord were reached. Bush said Monday that he believes a “good budget agreement will result in lower interest rates.”

But Fed officials indicated Monday that they consider the deficit-reduction accord inadequate and have no plans to nudge rates down when the Fed’s policy-setting Federal Open Market Committee meets here today.

Fed officials insisted in interviews that earlier statements by Fed Chairman Alan Greenspan have been misinterpreted and that he has never offered easier monetary policy in return for a budget agreement.

Federal Reserve spokesman Joseph Coyne stressed that Greenspan has promised only that the central bank will let the financial markets judge the package. If the credit markets are pleased and short-term interest rates fall on their own, the Fed “won’t stand in the way.”

“We never said we would ease,” Coyne said.

The financial markets turned in a decidedly mixed response to the budget accord on Monday.

On the New York Stock Exchange, the Dow Jones Industrial Average surged more than 63 points on the day, buoyed both by the budget accord and by a sharp drop in oil prices.

But, the dollar continued to plunge on the foreign exchange markets, reflecting continued disappointment with U.S. economic policies.

“The market didn’t expect miracles (from the deficit agreement). They knew this was about as much as you could get,” Robert D. Hormats, vice chairman of Goldman Sachs International, observed. “But, if they had failed to get an agreement, the reaction would have been very negative.”

There was also a growing sense of disappointment among economists on Monday that the budget negotiators had achieved so little in the way of real spending cuts during their marathon talks.

Since the Iraqi invasion of Kuwait, which sent oil prices soaring, the Fed has refused to move on its own to reduce interest rates, fearful that inflation may spiral out of control as a result of easier monetary policy.

Some Fed officials said that they are increasingly hesitant about lowering interest rates because they are concerned about the rapid decline in the value of the dollar over the last few weeks.

A lower dollar increases inflationary pressures on the economy and makes it more difficult to attract foreign investors to help fund the federal deficit. Fed officials apparently are worried that lower interest rates could further damage the dollar’s value.

“The lower dollar makes for a very narrow path for the Fed to follow,” one official said. “It makes the policy environment very difficult.”

Other economists agreed that the Fed is unlikely to ease monetary policy, largely because the new budget agreement will result in only a slight reduction in the deficit this year.

Although the agreement calls for much larger cuts later in a five-year plan, economists say they believe the Fed is skeptical that those long-term targets, which rely heavily on unspecified spending cuts, will ever be met.

Still, the financial markets seemed at least to display relief Monday that an agreement had been reached.