Editor's Note: In yesterday's Federal Indicators column, two paragraphs were inadvertently dropped. The complete column follows.]
WASHINGTON -- The cordial relationship between the Clinton Administrative and the Federal Reserve is still intact despite three increases in short-term interest rates by the Fed and the strong probability of another move to a 4% federal funds rate in May.
Clinton's top economic advisers continue to avoid any criticism of the Fed, and in fact share the central bank's goal of wiping out the low interest rates that have helped fuel the economy's rebound.
The most explicit comment on the ongoing ties between the White House and the Fed came last week from Laura D. Tyson, head of the President's Council of Economic Advisers, when she met with reporters after the government reported that U.S. output slowed to 2.6% in the first three months of the year.
"If policy is done correctly, this is what we're trying to do, and this is what I believe the monetary authorities are trying to do -- you get the economy to gradually glide into, or slow down to, its long-run capacity growth," Tyson said.
Setting aside the rough syntax and jargon, this is an statement acknowledging that the administration shares the Fed's goal of reining in the economy a bit to head off the threat of higher inflation. Most economists agree that this means keeping growth channeled in a range of 2.5% to 3% a year.
Tyson was careful to emphasize that administration officials believe there is still plenty of slack left in the economy, with factories operating at less than full potential and with plenty of people who are unemployed. There is room, she said, for the economy to grow faster "for some quarters," but she also stressed that inflation seems to be firmly in check.
Still, there is no mistaking the tone of mutual respect and understanding, if not outright cooperation, that continues to characterize the relationship between the Fed and the White House.
These ties are now getting tested by mounting congressional criticism of the Fed. Sens. Paul Sarbanes, D-Md., and Jim Sasser, D-Tenn., called in reporters to denounce the Fed's policy of raising rates shortly after Tyson breezed through her press conference. Sarbanes is in line to become chairman of the Senate Banking Committee next year, and Sasser chairs the Budget Committee.
"Just as the economy is coming back up for air, the Fed is pushing it back down again," said Sarbanes. "The Fed launched a preemptive strike against inflation, but it's actually a preemptive strike against growth."
A group of 45 senators and House members sent a letter to Fed Chairman Alan Greenspan saying the recent credit-tightening moves "could be likened to a physician's prescribing antibiotics without any specific sign of illness, on the grounds that the patient will doubtless develop an infection at some time in the future."
The letter, which was organized by Sen. Byron Dorgan, D-N.D., warned that Greenspan is promoting a "two-tiered recovery" that benefits investors at the expense of millions of Americans left out of the expansion of the 1980s.
Congressional aides say it is clear that the White House is not joining in the criticism of the Fed. "The White House does not want to pick a fight with Greenspan at this point," said one aide, perhaps because the president is still looking good with an improving economy and tax increases that are helping to slash the budget deficit.
Another congressional source said that Robert Rubin, head of the president's National Economic Council, and other advisers with contacts at the Fed and knowledge of financial markets remain adamant about not criticizing Greenspan in public. They believe that doing so would only rattle the bond market by creating an impression of political pressure on the central bank, forcing rates higher than they would be otherwise.
