In Focus: Rate Cut Improves Odds That Clinton Will Propose 4 More Years

WASHINGTON - The Federal Open Market Committee's decision last week to drop the federal funds rate by 25 basis points did a lot more than send the stock market to record highs.

In one fell swoop, the rate cut boosted Fed Chairman Alan Greenspan's prospects for reappointment, marked the emergence of the two Clinton appointees as key players, placated political leaders, and restored the Fed's credibility in the markets, according to followers of the central bank.

For Mr. Greenspan, an inflation hawk, the cut diffuses congressional and White House criticism of the central bank's policy.

"He is in a pretty good position now," said Jim Chessen, chief economist at the American Bankers Association. "He has not disrupted the markets, in that they expected a decline. By not going 50 basis points, he doesn't have to apologize for rate increases that occurred at the start of the year. And he is acknowledging some slowness in the economy that requires attention by the central bank."

Other economists shared that view. "I'm sure the Clinton administration must have at least a favorable response," said David A. Lereah, chief economist at the Mortgage Bankers Association of America. "When it is reappointment time, this is one of those factors that will be considered."

The drop also constitutes a victory for Fed Vice Chairman Alan Blinder and Governor Janet Yellen, the President's two appointees to the central bank.

Mr. Blinder, in particular, has hinted in recent weeks that the time has come for rate cuts.

"It is very possible we wouldn't have seen a cut at all if Blinder and Yellen weren't there," said Dean Baker, an economist at the Economic Policy Institute.

"It is obvious that Blinder and Yellen have played a role here," agreed Mr. Lereah. "They were the proponents of easing, and they were less comfortable with the previous Fed policy."

The benefits to Mr. Greenspan and Mr. Blinder assume added significance because Mr. Blinder is widely believed to covet the chairman's job. Mr. Greenspan's second four-year term will end next March.

Mr. Chessen said that Mr. Greenspan is in the driver's seat if he can use this rate cut and future moves to keep the economy going through spring.

"If he doesn't perform in that role as viewed by the administration and the Hill, then someone else gets the job," Mr. Chessen said.

The unknown is whether Mr. Blinder will publicly advocate additional rate cuts, Mr. Chessen said.

"His comments before established him as an important player in these decisions, and he is taking very seriously that role as Fed vice chairman," Mr. Chessen said. "To the extent there may be disagreements over the next couple of months, it will be interesting to see how he plays it."

The cut also pleased political leaders. New Jersey Republican Rep. Jim Saxton, vice chairman of the Joint Economic Committee, welcomed the reduction. And, Rep. Henry B. Gonzalez, a Texas Democrat and a vocal Fed critic, toned down his normally harsh criticism (though he still threw a couple of jabs at the Fed).

Other economists said the Fed had to cut rates because the markets already had dropped them by about 50 basis points.

"In a sense, the emperor was caught without his clothes on," said Bert Ely, president of the bank consulting firm Ely & Co. "To get more fully clothed, the emperor needs to bring his rates back in line."

The forced cut shows the Fed is a follower rather than a leader, said Mr. Ely, a noted central bank critic.

"This is just one more piece of evidence that the Fed really doesn't count as much as it used to," he said.

But Richard I. Sichel, chief investment officer at Bryn Mawr Trust Co., said that view ignores the Fed's effective fight against inflation.

"It may be a case of the Fed catching up," Mr. Sichel said. "But that doesn't diminish what the Fed has done or can do. Moving in to raise rates sooner rather than later was a positive thing."

The open market committee next meets Aug. 22 to consider interest rate policy.

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