WASHINGTON--President Clinton has finally put some distance between himself and Federal Reserve Board Chairman Alan Greenspan.

In an interview with Sam Donaldson on ABC-TV, Mr. Clinton candidly warned that any further increase in interest rates by the Fed could start to put a dent in what is now a healthy expansion.

Unless the inflation numbers start to look more troulbesome, the Fed should leave rates alone for the rest of the year, the President said.

Mr. Clinton's comment signaled a new wariness on the part of the While House toward the Fed, ending a honeymoon that dated from Dec. 3, 1992, when Mr. Greenspan and Mr. Clinton met for the first time in Little Rock after the presidential election.

Encounter Was Cordial, Crucial

That meeting, now chronicled by Washington Post reporter Bob Woodward in his new book, "The Agenda," turned out to be crucial in cementing the cordial relationship that the two maintained even as the Fed raised rates this year.

Mr. Woodward tells how the Fed chairman tutored the President-elect on bond market fundamentals, explaining the difference between short-term and long-term rates.

Short rates, then at 3%, are directly controlled by the Fed and were about right, Mr. Greenspan said. The problem was that long rates, which reflect inflation expectations, were too high.

Deficit Reduction Urged

Mr. Greenspan told the President-elect that, if he could push a large deficit reduction bill through Congress, the bond market would react positively to the prospect of reduced federal demand for credit and bring down long rates. That, in turn, would fuel economic expansion.

Mr. Clinton and his top aides bought this analysis and, indeed, were rewarded for a while by a roaring bond market rally that brought rates down and jacked up the economy.

But Mr. Greenspan apparently did not tell Mr. Clinton the flip side to all this. He failed to explain that, once the economy got going, inflation worries would be stirred in the bond market and the Fed would be forced to raise rates.

He also neglected to explain that long rates typically rise when the Fed tightens, although not as much as short rates do.

In public, Mr. Greenspan has played down the Fed's rate increases, describing them in technical terms as a step to remove an unneeded stimulus in an expanding economy.

But the central bank chief and his colleagues know full well that their preemptive strike against potential 1995 inflation pushes rates up across the board in an attempt to slow the economy to a more moderate pace.

Most economists calculate that the economy can't grow faster than 2.5% a year over the long haul without generating price pressures.

'Good' Growth in 1995?

It's a good bet that growth in that range is what Fed officials will present as a tentative forecast for 1995 when Mr. Greenspan testifies to Congress in July. By comparison, U.S. output this year is expected to rise 3% or more.

Mr. Clinton and his top economic aides have endorsed the Fed's moves so far because they have accepted the argument that some adjustment in rates could keep a lid on inflation and prolong the expansion.

It is a plausible case that Mr. Greenspan himself makes.

But Mr. Clinton's latest comments make clear that he is likely to view any further rate increase as an unjustified assault on the economy. The President is no longer Mr. Greenspan's man. He has had his lesson in bond market fundamentals.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.