WASHINGTON -- The Federal Reserve's dramatic move to push interest rates lower late last week was in part a preemptive strike aimed at discouraging the White House and Congress from trying to enact a "quick-fix" economic stimulus package next year, some analysts say.
"The Fed wants to send the message that they will do what they need to keep the recovery alive, and it is not necessary for Congress to engage in silly fiscal games" during an election year, said Jeremy Gluck, an economist with Mitsubishi Bank.
Fed Chairman Alan Greenspan "made it very clear in testimony last week that he is opposed to 'quick-fix,' short-term growth at the expense of the long-term viability of the expansioin," he said.
Thomas Carpenter, senior vice president of ASB Capital Management Inc., agreed that while the Fed's move was primarily designed to dramatically bolster consumer and business confidence and the saggin economy, it also was intended as a signal to lawmakers not to go "overboard" in drafting a stimulus package that could send the deficit and interest rates soaring.
"The Fed is saying, 'Please don't come up with that stupid $300-per-person rebate'" that is being considered at the White House among a dozen other tax-cut proposals to provide a quick cash infusion for the economy, he said.
"The Fed doesn't want to be in a position where, after working with great effort and skill" to bring inflation down and get the economy moving, "it sees everything squandered by a fiscal policy package which has no long-term redeeming value to the economy or the American people," he said.
The success of the Fed's move to forestall drastic action by legislator remains unclear after the White House announced it was moving forward with plans to propose an economic stimulus package in January and had not ruled out the $300 rebate proposal or any other options on the table.
Economic experts from Fed Chairman Greenspan on down have particularly decried the rebate idea, saying it would do little to immediately stimulate spending by consumers, who are just as likely to use it to pay off debt or add to their savings. On the other hand, it almost certainly would spook the bond markets and send the deficit and interest rates soaring, unless it was "paid for" with higher taxes, they say.P
"Most taxpayers and investors will view such cuts cynically, as short-sighted attempts to please voters in an election year," said Roger Brinner, vice president of DRI-McGraw Hill.
In another interpretation of the Fed's move, Mr. Gluck said it may have been anticipating, instead of preempting, action by Congress next year. "One reason they wanted to act aggressively at this point is that once some kind of stimulus gets moving in Congress, it will be very difficult for the Fed to ease further," he said.
"You will see long-term yields go up and the yield curve steepen sharply" as legislation is drafted, putting pressure on the Fed to use restraint, he said. "By getting a lot of easing in now, they won't have to do that much next year," he said.
Not all economists favor Congress taking no action next year. John Kenneth Galbraith, for one, said concern about the deficit should be suspended for the time being so Congress can enact a "prompt and energetic program of investment in our gravely deteriorated public capital."
In recent testimony before the House Budget Committee, he also urged implementation of a substantial program of grants and loans to state and municipal governments to "arrest" their "highly publicized often very cruel cuts in public services."
"There must be an end to the way in which state and local governments are contributing to the recession and the recession psychosis," he said.
Mr. Carpenter said Congress could do some good for the economy if it concentrates on measures that would stimulate long-term economy growth and individual retirement account deductions, a business investment tax credit, and restoration of the passive loss tax break for investors in existing real estate.
Mr. Gluck said he could go along with a temporary investment tax credit to provide a quick infusion for the economy, but he said a capital gains tax cut would private little benefit.
"My preference is for them to do basically nothing," he said. And despite the bond markets' fears that Congress will go overboard, he said, it may end up doing nothing simply because most members of Congress -- like most economists -- cannot agree on what to do.
"One should never underestimate the capacity of Congress to fail to achieve something," he said.
