WASHINGTON -- The Bush administration gave a curt nod of approval yesterday to the Federal Reserve's current policy of keeping short-term interest rates unchanged, but it warned that Fed officials should be prepared to ease credit again to sustain economic recovery.
Michael Boskin, chairman of the President's Council of Economic Advisers, said it makes sense to adopt a "wait-and-see attitude" on rates for a "very short period" to see if the recovery is as robust as Fed policymakers are forecasting and to make sure inflation is under control.
Mr. Boskin's comments before the congressional Joint Economic Committee seemed to signal at least temporary support for Federal Reserve Board Chairman Alan Greenspan, whose semiannual monetary policy statement to Congress last week was widely viewed as confirming that monetary policy remains on hold.
But Mr. Boskin made a point of adding that the administration may seek further easing of short-term rates by the Fed if the recovery proves feeble. "I think that the Fed is going to have to be prepared to add reserves to the [banking] system if it looks like the economy is going to be sluggish."
"Basically, he's saying don't take too long to decide whether the economy is taking off at a sustainable rate," said Thomas Carpenter, chief economist for ASB Capital Management Inc. "If there's any doubt, he wants the Fed to cut rates and make sure money supply is growing."
Last week, Mr. Greenspan testified that Fed policymakers are looking for real output of U.S. goods and services to rise from 2.25% to 3% in 1992, somewhat less than the administration's forecast calling for growth of 3.6%.
Mr. Greenspan also revealed that Fed officials tentatively agreed to leave money supply targets unchanged next year. The target range for the M2 measure of money, which includes checking deposits as well as savings deposits and money market funds, was left at 2.5% to 6.5%.
Under questioning from Rep. Lee Hamilton, D-Ind., Mr. Boskin said the Fed's money supply targets may be enough to meet the administration's projected rate of economic growth. But that will require some increase in velocity, or the rate at which money turns over in the economy, he explained. Normally, lower interest rates spur growth in the money supply as businesses and individuals are encouraged to borrow.
"Legitimate questions remain about the strength and durability of the recovery," Mr. Boskin told the committee in his opening statement. "While the economy appears to have stabilized in the second quarter," it is possible that inventory liquidation by businesses offset gains in other sectors, he said.
Mr. Boskin also said the continuing credit crunch "is probably the single biggest threat to a sustained recovery," especially for small and medium-size businesses that rely on bank loans.
The Commerce Department is schedule to release its preliminary estimate for second-quarter gross national product on Friday. Private forecasters are calling for an increase in the range of 1%, the first gain after two quarters of decline.
Much of the hearing was taken up with appeals by the committee's Chairman Paul Sarbvanes, D-Md., and other members for an extension of unemployment benefits beyond the regular 26-week period.
Under the budget agreement, Congress must find a way to pay for any additional outlays through offsetting spending cuts in other programs, Mr. Boskin said.
Democrats favor tapping the federal trust fund for long-term unemployment benefits, which has a balance that has built up to around $8 billion. The funds can be released if the administration declares an emergency, as it has done with Bangladesh and several other countries.