The Bush Administration, already fearing the political impact of the recession, last year pressured Federal Reserve Board Chairman Alan Greenspan for a commitment to pump up the economy during 1992, according to senior Administration officials. The pressure came at a time when Greenspan’s reappointment was being considered.
The Administration’s overtures, which were described by several high-ranking officials who requested anonymity, represented an extraordinary effort by the White House to exert influence over the independent central bank. The Fed, which has enormous potential power over the economy, was established as an independent agency to keep its policy decisions insulated from politics.
But in the spring and early summer of 1991, when Greenspan’s first term as Fed chairman was expiring, senior Administration economic policy-makers held a series of private meetings in which they urged him to agree to alter Fed policy in an effort to reach specific economic growth targets during the coming election year, the officials said.
Independent economists were sharply critical of the Administration’s behind-the-scenes efforts to pressure Greenspan on the eve of his reappointment. “I would regard that as improper,” said Allan Meltzer, an economist at Carnegie Mellon University and chairman of the Shadow Open Market Committee, a private organization that monitors Fed policy.
Greenspan, through a spokesman, acknowledged that he met privately with Treasury Secretary Nicholas F. Brady before his reappointment to a second term as Fed chairman was announced in July, 1991. The spokesman said Brady urged the chairman to lower interest rates more aggressively to stimulate the stagnant economy, but characterized as “nonsense” the notion that Greenspan would commit himself to specific economic growth targets.
Administration sources, however, said that Brady afterward told President Bush that he felt he had received an assurance from Greenspan that he would try to stimulate monetary policy sufficiently to meet an Administration target of 3% economic growth for 1992.
A Treasury spokeswoman confirmed that Brady was convinced Greenspan had agreed to the Administration’s growth goals, but said the Treasury secretary had sought Greenspan’s commitment to a range of future growth rates--not a specific target.
Other Administration sources said that, while they did not believe they had won a binding commitment from Greenspan, they thought they had reached an “understanding” with the Fed chairman on the need for much faster growth.
Since the recession began in 1990, the Bush Administration has made no secret of its displeasure with Greenspan and the Fed’s monetary policies.
The Administration felt that the Fed, concerned about a possible resurgence of inflation, was holding interest rates too high and was not doing enough to stimulate the economy.
In their face-to-face discussions with Greenspan, Administration officials apparently did not explicitly link his reappointment to their policy goals. But their advocacy of lower interest rates came at a point when the decision on Greenspan’s reappointment was still up in the air. In fact, Administration sources say the announcement of his reappointment was delayed until just before his term was scheduled to expire to increase pressure on the Fed chairman.
“I think it was scandalous the way the Administration kept Greenspan on tenterhooks waiting for his reappointment,” observed Anna J. Schwartz, an economic historian who has written extensively on U.S. monetary policy.
Whatever commitment Administration officials thought they had received from Greenspan, Fed policy since his reappointment has continued to disappoint the White House. While the Fed has reduced interest rates by four percentage points since the recession began in mid-1990, Brady and other Administration officials have called for even bigger cuts.
Now, with the lingering economic downturn threatening President Bush’s reelection hopes, some senior officials apparently are willing to discuss the negotiations with Greenspan in an effort to shift blame for the economy’s problems to the Fed. In addition, they may be seeking to leave the impression that the Administration has been more vigorously tried.
Brady recently stunned the central bank by endorsing legislation that would increase the ability of the White House to influence Fed policy. The bill would remove the presidents of the Fed’s regional banks, who are not appointed by the White House, from the Fed’s key policy-setting committee. That would leave only the members of the Fed’s board of governors, all presidential appointees, on the panel.
The seven board members are considered relatively immune from political pressure because they are appointed to 14-year terms and cannot be fired by the President. The chairman is appointed every four years, but serves an overlapping 14-year term on the board of governors. The Fed exercises control over the economy by influencing interest rates and regulating the growth of the money supply.
Last year, as Greenspan’s first term was nearing an end, Bush’s three senior economic policy-makers--Brady, White House Budget Director Richard G. Darman and chief economic adviser Michael J. Boskin--comprised an informal committee to advise the President on his reappointment. Then-White House Chief of Staff John H. Sununu was also involved in the discussions, sources said.
Darman had been especially unhappy with Greenspan’s performance since his appointment by President Ronald Reagan in 1987, sources said. The budget director felt the Administration should extract a solid commitment from Greenspan to follow a much more aggressive monetary policy in a second term.
Darman also urged other Administration officials to at least consider alternative candidates.
Sources said that Sununu also believed it was important to send Greenspan a message about the need for faster growth.
Sununu, who left the White House last December, acknowledged in a recent interview that Administration officials met with Greenspan “constantly” to try to get the message across that the White House was unhappy with Fed monetary policy.
Brady, meanwhile, met frequently with Greenspan during the weeks leading up to his reappointment. A Treasury spokeswoman said that during those meetings, Brady asked Greenspan whether the Administration’s targets for economic growth were achievable. The questions appeared designed to signal Brady’s desire for Fed policy to be brought into line with Administration policy.
At the time, the recession was widely believed to be ending, and Greenspan’s outlook on the economy had started to become much more positive.
Senior Fed officials, who asked not to be identified, said it is possible that Greenspan conveyed his newfound optimism to Brady in their meetings, and that Brady may have misconstrued that as a more solid commitment to a newly aggressive Fed policy.
But Fed sources noted that Greenspan, a master bureaucratic tactician who is highly skilled at avoiding political perils, almost certainly would not have made any real commitments to the White House. “I can’t imagine any Fed chairman committing himself to that,” said Stephen Axilrod, an economist at Nikko Securities in New York and former chief of staff to Fed Chairman Paul A. Volcker.
“That kind of White House pressure on the Fed is usually counterproductive,” added Fred Bergsten, an economist at the Institute for International Economics in Washington.
In addition, Fed sources and outside economists observed, Greenspan did not have the power to live up to the kind of commitments that the White House was apparently seeking. The members of the Fed’s board of governors and its regional bank presidents who vote on monetary policy are highly independent and under no obligation to follow Greenspan’s lead on policy matters.
“Greenspan can’t control everybody,” noted Robert Heller, president of VISA USA and a former member of the Fed’s board of governors.
What’s more, the Fed’s efforts to influence the pace of the economy over the past year have proved largely ineffective.
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