WASHINGTON - A year after his election, President Clinton finds himself in charge of an economy that is showing renewed spark while interest rates remain low despite last week's selloff in the bond market.
Increasingly, administration officials find they are comfortable with the blend of low rates, little inflation, and mild growth. It is also a mix that has proved much to the liking of the Federal Reserve and created an environment that has helped to fuel this year's solid gains in stocks and bonds.
Alicia Munnell, the Treasury's assistant secretary for domestic finance, signaled the administration's satisfaction with the economic outlook last week. While job growth remains too slow, "the recent readings on the economy suggest a much improved pattern is beginning to emerge," she said.
But Munnell also acknowledged that administration officials do not want the economy to overheat. "It's also well to remember that an economy can grow too fast as well as too slow," she said.
The statement was an important recognition by the Treasury that unbridled growth would only stir inflationary pressures and force the Federal Reserve to raise interest rates. That in turn would spoil the fun for the stock market, which has been buoyed for most of the year by falling rates.
Last December, a month before Clinton's inauguration, the yield on the 30-year Treasury bond hit 7.50%. The spectacular rally in the market since then took the long bond below 6% before the recent selloff that pushed the yield back to 6.25%. Borrowing costs for businesses, consumers, and government have been reduced across the board.
The drop in rates has also brought boom times to Wall Street, fueling a surge in municipal and corporate bond underwriting business. Companies have rushed to refinance existing debt and issue new stock, and investors have eagerly loaded up on stock and bond funds - helping push prices higher.
Economists do not give Clinton's deficit reduction package much credit in all this, although they acknowledge that the President's program helps slow the rising tide of federal debt.
Lincoln Anderson, chief economist for Fidelity Investments, says stocks are benefiting more from corporate cost-cutting, as employers keep payrolls lean while stepping up investment on computers and other capital equipment.
The bond market's gains, Anderson says, are more the result of reduced inflationary expectations and general satisfaction with the way Federal Reserve Board Chairman Alan Greenspan and his colleagues are conducting monetary policy.
Moreover, sources say Greenspan and Clinton remain on amicable terms. Clinton backed up Greenspan by sending a letter to House Banking Committee Chairman Henry Gonzalez, D-Tex., opposing any attempts to reform the central bank. Ironically, Republican-appointed Greenspan is believed to be on better terms with Clinton than he was with President Bush, who was irritated with the Fed's slow pace in lowering rates.
The favorable conditions that produced this year's gains for stock and bond investors have not disappeared. What has changed is that late-year economic statistics are confirming a spurt in growth that could push growth in fourth-quarter gross domestic product as high as 4%, a distinctly faster pace than the sluggish 1.3% gain posted during the first half of the year.
But many economists are convinced growth will slow to a more moderate pace next year. Corporate downsizing, defense cutbacks, sluggish real estate markets, and weak foreign economies are still part of the landscape. State and local governments remain strapped, and additional drag is expected from a tight federal budget as Clinton's tax increases take hold.
Accordingly, the case for a marked acceleration in U.S. output with rising prices - and steadily rising interest rates - remains to be made.