Like two battleships, President Clinton and Fed Chairman Alan Greenspan seem to be gradually steering toward a clash.
The changes of course are subtle and to not necessarily mean immediate heavy fire. But the first warning signals have been sent.
The issue is whether the Federal Reserve Board should leave short-term interest rates alone until the economy shows much more strength, or whether slightly higher rates will be needed to keep inflation under control.
Mr. Greenspan staked out his position in recent testimony to Congress. He warned that if the current 3% rate of inflation gets a notch higher, Fed officials will probably feel compelled to tighten monetary policy. He did not say when that might happen.
Some analysts think it might not be until late this year or early next year, and they say any rise in rates will be slight. Rates on 30-year home mortgages could go from the current 7 1/4% to 7 1/2%, and 15-year mortgage rates might rise from 6 3/4% to 7%.
President's Rebuttal
In a White House conference call with newspaper editors, President Clinton gave his first public reaction to Mr. Greenspan's testimony.
"I don't think you should raise interest rates until there's real economic growth that brings on real inflation," the President said.
"I mean, there's no real inflation in this economy, and we can have growth without inflation."
At best, the President's comments reflect the down-home view of most Americans, who don't exactly talk about inflation at the corner market these days.
But it is not the view of Fed policymakers, who take a 3% inflation rate as a problem that must be contained before it gets out of hand.
The Clinton Test
What is more interesting is the benchmarks that President Clinton has set up in his own mind for when it would be appropriate to raise rates.
"If we were having 4% or 5% growth and inflation was getting out of hand, I could understand it," the President said. "But there's no grounds for it now."
Here is the real dividing line between the central bank and the White House. The days of steady growth in excess of 4% were last seen during the Reagan years, when baby boomers were stocking up on Volvos and split-level Colonials and dropping their kids off at the day care center.
Those days are not likely to come back any time soon in an economy with see-through office buildings and unemployed defense workers.
Both administration and Fed economic forecasts do not show growth estimates much in excess of 3% over the next five years. Douglas Lee, chief economist for County Natwest USA, estimates the long-range growth potential for the economy may only be around 2 1/2%, unless business productivity makes further strides.
Optimistic Scenario
It is reasonable to hope that the economy can do better, and that interest rates will not go zooming off into the blue as they did during the 1970s.
Analysts at Merrill Lynch estimate the economy will experience growth of 3% to 3 1/2% in the second half of the year with the help of low mortgage rates and stepped-up auto production. Still, that would be nowhere near the kind of growth the President is talking about.
Clinton's comments reveal an impatience with a central bank getting cranky about inflation when the economy is still soft.
But the bottom line is that the Fed will probably not be able to heed the President's appeal for holding rates steady.
Policymakers will not wait to see a growth rate of 4% or 5% before they tighten. The White House is setting down markers that are off the playing field.
