WASHINGTON -- President Clinton has finally put some distance between himself and Fed Chairman Alan Greenspan.
In an interview with Sam Donaldson on ABC-TV, Clinton candidly warned that any further increases to 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 troublesome, the Fed should leave rates alone for the rest of year, Clinton said.
Clinton's comments signal a new wariness on the part of the White House toward the Fed, ending a honeymoon that dates back to Dec. 3, 1992, when Greenspan and Clinton met face to face the first time in Little Rock after the election.
That meeting, now chronicled in the new book by Washington Post reporter Bob Woodward, turned out to be crucial in cementing the cordial relationship that Clinton and Greenspan maintained even while the Fed was raising rates this year.
Woodward tells how Greenspan tutored Clinton on bond market fundamentals, explaining the difference between short-term and long-term rates. Short rates, which are directly controlled by the Fed, were than at 3% and just about right, Greenspan said. The problem was that long rates, which reflect inflation expectations, were too high.
Greenspan told Clinton that if he could put together a large deficit reduction bill in 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 an economic expansion.
Clinton and his top aides signed off on this analysis, and, indeed, were rewarded for a while by a roaring bond market that brought rates down.
But Greenspan apparenlty did not tell 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. Greenspan also neglected to explain ot the President that long rates typically rise when the Fed tightens, although not as much as short rates do.
In public, Greenspan has down-played the Fed's rate increases, describing them in technical terms as a step to remove an unneeded stimulus in an expanding economy. But Greenspan and hs colleagues know full well that their preemptive strike aimed at inflation in 1995 is an exercise that 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. It's a good bet that growth in that range is what Fed officials will present as a tentative forecast for 1995 when Greenspan testifies to Congress in July. By comparison, U.S. output this year is expected to rise by 3% or more.
So far, Clinton and his top economic aides have endorsed the Fed's moves because they have accepted the argument that some adjustment in rates, by keeping a lid on inflation, could prolong the expansion. It is a plausible case that Greenspan himself makes.
But Clinton's latest comments make clear that the President is likely to view any further rate increases as an unjustified assault on the economy. Clinton is no longer Greenspan's man. He has had his lesson in bond market fundamentals.