Federal Reserve Chief Shows His Policy Independence

WHEN Federal Reserve Board chairman Alan Greenspan raised short-term interest rates earlier this month, he did so, he said, to head off inflation.

Many Fed-watchers also believe he was asserting independence from the Clinton administration, which has implored the central banker to maintain a monetary policy loose enough to stimulate the consumer purchases and business investments that help the economy grow and generate jobs.

The White House has credited itself with building a strong economic recovery by exhibiting fiscal restraint through its commitment to cutting the deficit and spurring appropriate moves by the Fed to reduce interest rates.

Investment banker-cum National Economic Council chairman Robert Rubin told reporters at a recent Monitor breakfast that low rates are the key to economic growth.

An important accomplishment for President Clinton's economic team, he said, was winning the confidence of Wall Street. A rise in rates, Clinton policymakers argue, could jeopardize those hard-won gains.

Fed chairmen are used to pressure. ``All the way back to the beginning, the head of the Federal Reserve Board who served during the same term as the president who appointed him was the tool of the White House,'' recalls a monetary official, offering a historical review of Federal Reserve Board-Executive Branch dynamics.

Perhaps the most obvious example in relatively recent history, he says, was President Nixon's appointment of Arthur Burns to the top Fed position in 1970.

Mr. Burns then ``helped set wage and price controls and served as chairman of the wage and price-control review panel, carrying out essentially a Cabinet-level duty.'' He was ``widely believed to have pumped up the money supply during 1972 to help reelect Nixon.''

Paul Volcker, appointed by President Carter in 1979, ``essentially asked for a mandate from Carter to be as independent as he needed to combat inflation,'' recounts the monetary official.

But President Reagan, who inherited Mr. Volcker as Fed chairman, ``feared Volcker's tight monetary policy during a time when he wanted a stimulative policy,'' he says. Volcker's conduct under Mr. Carter, and Mr. Reagan's distrust of him ``did much to build up the idea of an independent Fed,'' the official says.

Mr. Greenspan, he adds, ``is not close to the White House at all, notwithstanding the 1993 State of the Union address,'' when the Fed chairman occupied the symbolically important seat next to Hillary Rodham Clinton - a placement many observers said was designed to show a close working relationship between Greenspan and the president.

Capitol Hill lawmakers also seek to influence Fed moves, and Congress has its own semiannual opportunity for dialogue with central bankers.

DURING the Fed's ``Humphrey-Hawkins'' testimony before the House Banking Committee - in which the chairman assesses the economy and offers a sense of the Fed's policy inclinations - frustrated legislators are outspoken. Often, they use the testimony to challenge the Fed's approach; Tuesday's hearing was no exception.

Questioning the Fed's Feb. 4 rate hike, which triggered a 97-point stock-market drop that day, Rep. Toby Roth (R) of Wisconsin told Greenspan: ``I think all of us in Congress realize that you have more power over the economy than we do, and, of course, that's of great concern to us.''After claiming that the US economy is in its best shape in decades and issuing a rosy forecast for the future, Greenspan told a skeptical congressional panel on Tuesday that raising rates now is a ``low-cost insurance'' policy against the economy heating up in coming months and an expected jump in prices of goods and services. Waiting for the economy to worsen before acting just isn't prudent, he told the lawmakers, adding that short-term interest rates are likely to rise again.

He predicted a 3.25 percent growth rate in the gross domestic product, unemployment registering at or below 6.75 percent, and inflation hovering at roughly 3 percent.

``As best we can judge, the economy's forward momentum remains intact,'' Greenspan stated.

But many lawmakers and top Clinton administration officials worry that higher rates will slow, if not halt, that momentum. They are concerned that Greenspan will follow his now well-established pattern of implementing interest rate changes on a gradual and steady basis.

The Federal Reserve Board chairman's adherence to anti-inflation policies ``buys Clinton more credibility in foreign exchange and equities markets than he would otherwise have,'' the monetary official says.

Greenspan acts as a buffer, the official adds, between sober policy analysis and Washington politicians, whose short-term interests seek an accommodative approach that throws caution to the wind.