Clinton Gets a Break: Fed Keeps Rate Steady

It has been a good week economically for President Clinton.

The Federal Reserve didn't raise interest rates when its policymakers met Tuesday. "It shows we've got a strong economy with no inflation," the president said during a campaign visit in New Jersey. "I'm glad of that."

Then 546 economists, including seven Nobel laureates in economics, endorsed a statement opposing the large tax cuts proposed by Republican presidential candidate Robert Dole.

The result of such cuts, they agreed, "would be a lowering of future living standards.... The plan's assumption that a substantial part of the revenue lost by reducing taxes will be offset by new revenues from additional economic growth is not credible." The economists called on political leaders and citizens not to repeat the "tragic mistake" of the 1980s, when "supply-side" tax cuts produced a spiraling federal deficit and a jump in the national debt.

The signatures were rounded up by the Economic Policy Institute, a liberal think tank in Washington. The economists, the institute says, have diverse views on economic issues.

A majority of the public, according to a Wall Street Journal/NBC poll, agrees that the Dole tax cut plan of $548 billion over six years would force higher deficits - and reduce Medicare and education spending.

The decision of the Fed not to move was a surprise for many Wall Street analysts. "In 15 years of watching the Fed, I have never seen as much hype about a single Fed meeting," stated Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson Inc., a Chicago investment house.

Since the Fed said nothing as to the reason for its decision, observers could speculate freely. One thesis is that Fed officials were ticked off at the person within the Fed itself who leaked a story to Reuters wire service that eight of 12 Fed bank presidents wanted an interest rate hike, and thus they voted contrariwise. Only five presidents and seven Fed governors actually vote at policymaking sessions. The story didn't specify individual views.

Another thesis is that it was a political decision. Elections are close. Why rile Congress, which created the Fed and could change its charter, by taking a move that could have political impact? Seventy-eight lawmakers wrote to Fed chairman Alan Greenspan on Monday contending that a rate rise now would hurt, not help, the economy. All but two of them were Democrats.

A third thesis is that the Fed figured the economy is slowing already. Why not wait until the next meeting of the Fed's policymaking Open Market Committee Nov. 13 - after the election - to see if that slowdown is adequate to prevent faster inflation.

"The economy is slowing," says Gary Bigg, a senior economist at Prudential Economics in Newark, N.J. "We didn't see any reason for the Fed to make a move."

The evidence he and colleague Susan Hickok offer includes weak back-to-school retail sales, slower automobile sales, a modest rise in industrial production, a deceleration in private payroll growth, and little inflation. In the capital-goods sector, capacity utilization is below last year's average level. Construction is an outright drag on economic growth.

If the Fed had tightened growth, Ms. Hickok holds, the result could have been "very meager growth or worse in 1997."

Only three business expansions since 1854 have lasted longer than the current five-year-old business cycle. One of these occurred during World War II, another during the war in Vietnam, and the third in the Reagan years. Making a comparison with the Reagan expansion, Mr. Bigg notes a major difference.

"The expansion which began in November of 1982 was powered by strong income and consumption growth," he points out. "The current expansion is being driven by investment and profit growth." Equipment investment as a share of national output is at its highest level in history. Manufacturing capacity has grown 10.8 percent since 1993, boosting competition. Firms are making "a serious effort at containing costs by employing the latest technology." That can keep down the price of goods and services.

One bit of encouraging news for Dole: Despite polls showing a double-digit lead for Clinton, Ed McKelvey, an economist at the New York investment bank Goldman, Sachs & Co., finds a Clinton advantage of only 2 percent when he employs a forecasting model based on presumed links between election results and economic data, devised by Yale University economist Ray Fair.