White House Wants Low Rates - Always
THE recent warning shot fired by the Clinton White House at the Federal Reserve wasn't unusual.
``No administration ever wants to see interest rates go up,'' says Frank Morris, the former president of the Federal Reserve Bank of Boston. Mr. Morris served longer on the Fed's policymaking Federal Open Market Committee than anyone else.
Last week President Clinton was reported as saying that ``it would be inappropriate'' for the Fed to raise interest rates considering there is ``no indication that we're facing a return of inflation.'' He added that he would ``hate to see us take another step back in the first two quarters of next year'' due to a tighter policy.
Morris, speaking with the perspective of Fed experience going back to President Johnson's time, says: ``I don't think we are getting much static from this administration.'' Though retired since 1988, Morris still speaks with the royal ``we'' when the Fed is involved.
President Nixon and his staff attempted to ``strong arm'' the Fed more than any other administration, Morris says. He recalls attending the swearing-in ceremony of Arthur Burns as chairman of the Fed, and President Nixon saying, ``We expect you to keep interest rates down, Arthur.'' Though said with an attempt at levity, Morris thought Nixon's comment inappropriate.
The Clinton administration's concern is that the Fed, an independent body, will squash a recovery only now picking up steam by imposing a tighter monetary policy. In the third quarter, the nation's total output grew at a moderate 2.9 percent annual rate, according to revised numbers released Wednesday by the Commerce Department. Growth this quarter could be running above a 4 percent annual rate, many economists say.
A question much debated by economists is whether the growth rate will fall back again in the first half of 1994 as it did in the first half of 1993 after a vigorous fourth quarter in 1992.
Morris, who now teaches a course on monetary policy at Boston College, also worries about the possibility of a slowdown. Though agreeing with the view of most monetary officials that a revival of inflation must be prevented by raising interest rates before inflation has actually accelerated, Morris sees no need for such preemptive action until there is ``some evidence of a sustained, strong growth path.'' Perhaps by February, he says, it will be clear whether economic expansion has remained lively.
Since the end of the 1990-91 recession, the economy has seen five weak quarters with growth averaging a 1.2 percent real annual rate and six strong quarters with 3.8 percent average growth, Morris calculates. This assumes a 4.5 percent real growth rate in the current quarter. Growth over the whole recovery period has been running at a 2.5 percent average real rate.
Economists see numerous favorable economic factors at the moment. Housing construction shot up at an 11.9 percent annual rate in the third quarter, pushed along by the lowest mortgage rates in 25 years. Domestic-make auto sales climbed to an annual rate of 7.17 million in October and November from 6.65 million in September. Sales of light trucks climbed to a 5.66 million rate in November from around 4.8 million last summer. A boom in these two industries has typically led a lively expansion.
Moreover, the nation's money supply (M-2) has been growing somewhat faster in the last two months. Whenever M-2 accelerates, the economy picks up with a four- or five-month lag, notes Sam Nakagama, a Wall Street economist. In the fall of 1992, M-2 growth decelerated.
Mr. Nakagama has raised his forecast for real growth in gross domestic product to 3.5 percent in the first quarter of 1994, slipping to a 2.9 percent rate in both the second and third quarters. Leif Olsen, a New Canaan, Conn., economic and investment manager, sees it just as likely that the fourth quarter's economic vigor will continue through the first quarter of 1994 as it will slow down.
However, most economists are more cautious in their forecasts for the new year. The 51 economists surveyed monthly by Blue Chip Economic Indicators, a Sedona, Ariz., newsletter, on the average expect inflation-adjusted growth next year of 2.9 percent, about the same as the 2.8 percent seen for this year.
