WASHINGTON -- The Bush administration, expressing renewed concern over sluggish money supply, continued to pressure the Federal Reserve on Friday to consider another cut in interest rates.
Michael Boskin, chairman of the President's Council of Economic Advisers, made the appeal in comments to White House reporters after the Commerce Department reported that real gross national product edged up 0.4% in the second quarter. The increase, although small, marked the first expansion in U.S. output since last summer.
Equally heartening, the Comerce Department reported that inflation cooled considerably in the second quarter. The fixed-weight price measure of GNP rose only 3.0%, and the implicit price deflator was up 3.9%. Both measures had advanced 5.2% in the first quarter.
Mr. Boskin said the GNP report confirms the administration's view that a moderate recovery is und way and will gather steam in the months ahead, adding that inflation is "on a downward trend."
But Mr. Boskin went on to repeat the administration's concern that the Fed may have to ease credit further to nurse the recovery along. "Of course, we don't want to see much time go by before we start seeing the money supply numbers at a rate sufficient to support the recovery," he said.
He added, "Unless the money supply for reasons already in the pipeline starts to expand at a much more healthy pace, soon, then obviously the Fed will have to take action."
Alan Greenspan, chairman of the Federal Reserve Board, seemed to tell Congress earlier this month that Fed policymakers will keep rates unchanged for a while as they watch to see how the recovery unfolds. In the past, the Fed has been criticized in the bond market for continuing to adjust rates when recovery is under way, fueling inflation.
Moreover, Fed officials have argued that their cuts in short-term interest rates earlier this year will tend to boost the economy later as consumers and businesses take time to react by borrowing and spending more.
But money supply, which economists say typically responds to lower interest rates by growing more rapidly, has remained sluggish and at the bottom end of the central bank's target ranges. Growth in M2, the broad measure of the money supply most closely watched by the Fed and the bond market, rose only slightly in the week ending July 15.
Mr. Boskin's warning shot at the Fed was the third in the last month. He made similar comments, although slightly less urgent in tone, last week before the congressional Joint Economic Committee. He first raised the issue publicly in early July, after the Commerce Department reported that the unemployment rate jumped to 7.0%.
Financial analysts said the Commerce Department's report supported ported the notion that Fed monetary policy will remain on hold, despite pressure from the White House.
"For long-term rates to come down the market has to perceive the Fed as anti-inflationary," said Joseph Liro, senior vice president for S.G. Warburn & Co. "The longer they can keep a stiff upper lip, the further inflation will come down. In the end, that will make for a stronger economy."
Scott Pardee, managing director of Yamaichi International (America) Inc., said every time Bush administration officials try to jawbone the Fed, investors around the globe wince. "There's been no gain whatsoever in the long end of the market because there is no confidence that any improvement in inflation will be achieved. The attitude in Washington is a real problem for investors," he said.
The bond market is already looking ahead with nervousness to the prospect of continued economic recovery in 1992, higher inflation, and heavy Treasury borrowing to finance a bigger budget deficit, said Mr. Pardee.
But for now analysts said they believe a modest recovery is under way and that fears the economy will experience a double-dip recession -- meaning a relapse into recession after a short-lived recovery -- are unlikely to be realized. That was also the view expressed by Mr. Greenspan in his recent testimony to Congress.
"The recovery is going to be underwhelming," said Bruce Steinberg, head of macroeconomic research at Merrill Lynch Capital Markets. "The recession is over, and now the question is what kind of recovery we're looking at."
Economists said there are many factors that will restrain U.S. growth in the month ahead. Mr. Steinberg cited high household debt levels that make consumers less willing to spend, small gains in productivity, and the credit crunch -- which is part of a general weakness in the financial sector.
Other economists cited other hurdles for the economy. Slower growth among U.S. trading partners abroad is expected to curb demand for exports, which could also get hurt by a rising dollar, and there is no sign that commercial real estate is turning around, they said. Moreover, cutbacks in spending and layoffs by state and local governments are now beginning to bite.
The Commerce Department's report says personal spending, which accounts for two-thirds of GNP, advanced at an annual rate of 3.6% as consumers recorded large healthy gains in purchases of durable goods and service. It was the first increase after six months of decline.
Other accounts in the GNP that showed improvement were government spending and residential investment. In addition, businesses slowed their inventory added to output.
Business fixed investment fell 2.3%, but that was considerably less than the 16.3% drop in the first quarter. The trade sector also deteriorated. Exports rose 5.9%, but imports increased 31.6% as refiners stocked up on low-cost oil.