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Will Politics Affect Interest Rates?

July 5, 1995

WASHINGTON (AP) _ Federal Reserve policy-makers, who staunchly guard their independence, aren’t likely to talk openly about politics during their deliberations this week. But with Chairman Alan Greenspan’s term up next year, the question of whether to cut interest rates won’t be the only matter on their minds.

Fed officials convened closed-door discussions Wednesday with pressure growing to cut rates to guarantee that the current period of economic weakness does not turn into a recession.

Some private economists argue that the upcoming presidential election and Greenspan’s desire to be reappointed for a third four-year term as chairman next March could well influence the deliberations.

``Greenspan certainly doesn’t want to create a recession in an election year when he might be reappointed,″ said Sung Won Sohn, chief economist at Norwest Corp. in Minneapolis.

Whatever the Fed decides is likely to be an extremely close call. Private economists have been vacillating between predictions of an immediate rate cut and a belief that the central bank will prefer to wait until its August meeting because of mixed signals in recent economic reports.

``It could go either way. The Fed is divided and the economic data is confusing,″ said Allen Sinai, chief economist at Lehman Brothers Global Economics.

If the Fed does opt for an immediate rate cut, the announcement should come Thursday afternoon, at the close of the second day of deliberations by the Federal Open Market Committee. The committee is a 12-member panel of Fed governors and central bank presidents who meet eight times a year to decide the course of interest rates.

While the stock and bond markets probably would be only mildly disappointed by a failure of the Fed to cut rates this week, the political reaction could be something else.

On the eve of the meeting, Democrats in Congress sought to turn up the heat. Five members of the Joint Economic Committee sent a pointed letter to Greenspan calling for an immediate rate cut to address concerns about ``recession and unemployment.″

Democrats are worried that current economic weakness, brought on by seven straight Fed rate increases over a 12-month period ending in February, could lead to an outright recession next year as Clinton is beginning to campaign for re-election.

``We cut the throttle too soon and we’re losing altitude fast,″ said Rep. Pete Starke, D-Calif., one of the signers of the letter.

In a pointed reference to the Fed’s powers, the Democrats said timely Fed rate cuts in 1966, 1984 and 1986 kept economic recoveries alive. But in 1989, when Greenspan was also chairman, the Fed did too little, too late to avoid the 1990-91 recession, a downturn that helped make George Bush a one-term president, the letter asserted.

``When the FOMC meets, it should immediately cut interest rates enough to ensure that the slowdown in the economy does not become a recession,″ the Democrats wrote Greenspan.

Clinton, who made the poor economy issue No. 1 in 1992, has avoided any hint that he was trying to pressure the Fed. But his chief of staff, Leon Panetta, contended in a televised interview last month that the administration would like to see rates cut.

Sohn predicted the Fed will cut rates this week, reducing the federal funds rate, the interest that banks charge each other, from 6 percent down to 5.5 percent.

David Wyss, an economist at DRI-McGraw Hill Inc., agreed that political considerations might well affect the timing of a rate change, noting that it takes about a year for a Fed rate cut to be fully felt in the economy.

``Let’s face it. Everybody knows there is an election and everybody knows the chairman is up for reappointment,″ Wyss said.

But other analysts say a reading of Greenspan’s tenure since taking over as chairman in August 1987 from Paul Volcker shows that he has fiercely guarded the central bank’s political independence.

In 1991, Greenspan failed to lower interest rates as quickly as the Republicans wanted and in retribution, Bush delayed for several months announcing his decision to reappoint Greenspan to a second term.

``Greenspan isn’t going to crawl on his hands and knees and beg for reappointment,″ said David Jones, an economist at Aubrey G. Lanston & Co.

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