WASHINGTON - In an unusual move, Federal Reserve Board Governor Wayne Angell bluntly criticized Germany's central bank yesterday for keeping interest rates high and slowing growth in the rest of Europe.
Appearing before a group of accountants, Mr. Angell also said Fed officials are determined to protect the value of the dollar in foreign exchange markets and avoid rate cuts that reignite inflationary fears in the bond market.
"Monetary policy for all of Europe is being made by the Bundesbank," said Mr. Angell. "My friends in the Bundesbank are thinking a little small these days."
Mr. Angell, comparing the size of the economy in eastern Germany to that of Louisiana, said that German banking authorities are forgetting that their actions have an impact throughout Europe.
High German rates in response to the inflation caused by German reunification have been causing problems in global exchange markets recently, putting pressure on the currencies of the United States and other nations that have lower interest rates because their economies are weaker.
The United States and European nations would like to see lower German rates, which presumably would help them carry out monetary policies favoring low rates without having to worry about their currencies.
The foreign exchange market jitters continued yesterday when Sweden's central bank, seeking to defend its currency within the European monetary system, jacked up the overnight funds rate to 75% from 24%. The action came after Finland took the opposite tack and decided to allow a sharp devaluation in its currency instead of raising rates.
"The dollar is extremely under-valued," Mr. Angell said. "The exchange rate mechanisms today are under somewhat of an assault."
But he asserted that the U.S. economy is not in recession, and he implied Fed officials do not want to act precipitously to lower rates. "The Fed has not lost sight of its target because we know that U.S. economic growth will be stronger if we follow our requirements than it would be if we tried to reinflate," he said.
The Fed also has to be careful not to agitate "those bond vigilantes" and foreign exchange markets, Mr. Angell said. "The world needs a stable and strong dollar."
Mr. Angell said the U.S. economy is gradually recovering from the excessive debt and consumption and high inflation that were prevalent in past years. Household balance sheets are gradually being repaired as people build up their savings and reduce debt, he told the accountants.
Separately yesterday, Deputy Treasury Secretary John Robson hinted that German officials may be more inclined to adopt more growth-oriented policies, possibly including a lowering of interest rates.
"They may be coming around," he said after a speech to the America Electrical Association. "World growth is in everybody's best interest."
German central bank authorities signaled yesterday that they were not shifting policy on rates when they drained a large amount of reserves from the banking system.
But Mr. Robson said the United States and other trading partners are continuing to pressure Germany to lower rates. "There are trade-offs between growth and anti-inflation policies, and some of their neighbors, along with the U.S., have been reminding them of that," he said.
Mr. Robson also said that if Mr. Bush is re-elected, the administration will seek to change the tax laws to eliminate the double taxation of corporate income, as recommended by a Treasury report.
"This isn't something just gathering dust on the shelf," said Mr. Robson, referring to the report. "This [issue] is not something that's going to go away."