NEWS ANALYSIS : The Fed: How It Will React to Clinton : Commerce: Monetary policy will be the only economic decision-making apparatus the President-elect won’t control. It may remain conservative.
When President-elect Bill Clinton moves into the White House in January, the Democratic Party will gain control of all of the major levers of economic policy-making, with one critical exception--the Federal Reserve Board.
In fact, it appears that the nation’s independent central bank could be controlled by appointees of Ronald Reagan and George Bush throughout Clinton’s four-year term. In addition, conservatives dominate key posts in many of the Fed’s influential regional banks. As a result, monetary policy during the Clinton Administration may continue to bear a conservative stamp that is suddenly out of fashion almost everywhere else in Washington.
Fed Chairman Alan Greenspan, a Bush appointee now in his second four-year term, won’t come up for reappointment again until March, 1996. What’s more, only two other members of the Fed’s seven-person board of governors will see their terms expire before the next presidential election.
In addition to Greenspan, a lifelong Republican who was President Ford’s chief economic adviser, three other board members were appointed by Bush. Two of them, Vice Chairman David Mullins and board member Lawrence Lindsey, held economic policy-making positions in the Bush Administration before moving to the Fed.
To be sure, some Fed board members could resign before their terms expire, making room for Clinton appointees. Fed officials constantly stress their independence. While Fed governors are appointed to 14-year terms (the chairman’s four-year term is concurrent with his 14-year term as a board member), few stay for the duration. Many of the board’s current members, in fact, are serving out the remainder of terms of previous members who resigned early.
But even if the Reagan-Bush appointees stay on, the Fed is almost certain to avoid openly partisan battles with Clinton. The Fed prides itself on its tradition of staying above the fray of partisan politics. Fed officials constantly stress their independence, and insist that their Republican roots will not affect the way they deal with the Clinton White House.
“We take the nonpartisan nature of our jobs very seriously,” noted a senior Fed official who asked not to be identified. “You cannot call this a Republican Fed.”
Throughout its history, the Fed has not always been successful in keeping political considerations at bay. But the Fed has repeatedly demonstrated its independence under Greenspan.
In the heat of the 1988 presidential race, for example, the Greenspan Fed raised interest rates to try to cool off an overheated economy--an action that had the potential to hurt Vice President Bush’s election hopes that fall.
Throughout 1991 and much of 1992, Greenspan also resisted intense pressure from the Bush White House to accelerate the pace of the central bank’s interest-rate reductions in an effort to pump up the economy before the 1992 election. That pressure led to a deterioration in relations between the White House and the Fed, especially between Greenspan and Treasury Secretary Nicholas F. Brady.
Yet Greenspan is not one to go out of his way to pick fights with the White House. He is, in fact, highly attuned to the ways of Washington and understands how to survive in a changing political landscape. Although Greenspan has indicated that he has no plans to resign early, many observers believe that he will try to be as accommodating as he can to the new Clinton Administration. So Greenspan is likely to try to develop good personal relations with economic policy-makers in the White House.
Indeed, while there has not yet been any communication between the Fed and the Clinton transition team, Fed spokesman Joseph Coyne noted that Greenspan would be happy to meet with Clinton at any time.
“Greenspan is a political animal and can play both sides,” observed David Hale, an economist at Kemper Financial Services in Chicago. Hale and others believe that Greenspan may actually welcome a change in the White House, since he had become a favored whipping boy of Bush Administration economic policy-makers, who frequently blamed the Fed for the nation’s slow recovery.
For his part, Clinton has also indicated that he wants to work with Greenspan. During the Oct. 11 presidential debate, he said the Fed’s policies were “sound.” He also distanced himself from proposals to reduce the Fed’s independence from Congress and the executive branch.
But while Greenspan and Clinton may try to work together, the Fed chairman cannot speak for the entire leadership of the central bank. And, while Fed officials will be careful to avoid battles with the Clinton Administration that seem to be drawn along party lines, that isn’t likely to obscure the deep ideological differences over economic policy that may eventually surface.
Clinton may actually run into greater resistance from the Fed’s regional bank presidents than he will from the Reagan-Bush appointees on the Fed’s board of governors. Many of those regional bank presidents are hard-core conservatives who believe that the overriding focus of Fed policy should be to wipe out inflation.
In the past, some of those officials have suggested that they would be willing to sacrifice some economic growth to achieve real price stability, which they think means zero inflation or something close to it. (The views of the Fed’s 12 regional bank presidents matter because five of them vote on monetary policy on the Fed’s Open Market Committee on a rotating basis.)
Ultimately, there could be a confrontation between the Fed’s conservatives and the Clinton Administration, which is expected to follow more activist tax and spending policies than did the Bush White House.
Once the economy begins to recover, the Fed’s anti-inflation hawks may worry that stimulative government policies could worsen the budget deficit, drive up long-term interest rates and reignite inflation.
For the time being, however, it appears that the Fed is unwilling to pick a fight with Clinton. “It really has to be wait and see right now,” said a senior Fed official. “We don’t know really what he is going to do.”
Fed officials have expressed concern about signs of continued weakness in the economy, and appear convinced that inflation does not seem likely to spike up incoming months. As a result, some apparently believe that a more stimulative fiscal policy early next year would not cause inflationary problems.
In fact, some Fed officials argue that the worst of the economy’s deep structural problems, which bedeviled George Bush’s presidency, may be over. If so, that would give Clinton an opportunity to enjoy the benefits of more rapid economic growth in a period of low inflation.
Several senior Fed officials have signaled, in speeches and other public comments, that the Fed would not stand in the way of a Clinton economic recovery program. The President-elect has proposed an increase in spending on public works programs and new tax cuts to give businesses incentives to invest and create jobs.
“There’s some room in there for him to have some new spending programs,” Jerry Jordan, president of the Federal Reserve Bank of Cleveland, said in a recent speech.
Wall Street had been fearful that a Clinton economic stimulus package would significantly increase the deficit in the near term, adding to inflationary pressures. That, in turn, could prompt the Fed to raise short-term interest rates as an anti-inflation strategy. In the financial markets, fears about excessive fiscal stimulus have contributed to a recent rise in long-term interest rates, which are not controlled by the Fed.
But most outside analysts believe that the Fed will not move against Clinton early next year. “Year One should be easy,” said Hale. “The hard part will come in the out-years. I think there will be the potential for trouble in a couple of years between Clinton and the Bush appointees, but I don’t think we will see tension at first.”
“My sense is that Greenspan would welcome a fiscal package, to take some of the burden of stimulating this economy off of the Fed,” added Robert Hormats, vice chairman of Goldman Sachs International and a former economic policy-maker in the Jimmy Carter Administration. “In the Bush Administration, economic policy amounted to simply beating up on Alan Greenspan to lower interest rates, and I think he would see this as an opportunity to change that.”
Still, most analysts believe that the Fed will be forced to raise interest rates toward the end of next year as the economy begins to strengthen. Several economists say they expect the Fed to raise interest rates by about one percentage point by the end of 1993--not because of Clinton’s policies, but because of an economic recovery.
“I do think that there will be Fed rate increases, but not to slap the wrists of fiscal policy-makers,” said Alan Levenson, an economist and Fed watcher at the WEFA group, a Bala Cynwyd, Pa., economic forecasting firm. “All the passage of a stimulus package will do is add to the pile of signs that the economy should be getting better by the end of the year.”
