Clinton and the Fed

THE United States economic recovery shows modest signs of picking up speed. That would be great news for President-elect Bill Clinton. He could easily enjoy four years of business expansion, plus a low rate of inflation not seen in the US since the 1960s. Prosperity could make him virtually unstoppable in 1996 - all thanks to Republican appointees in the Federal Reserve System.

It was largely the Fed that cost President Bush the election. Under Alan Greenspan, the central bank has cut interest rates by almost 7 percentage points since mid-1989. But its policy of monetary gradualism was not energetic enough to overcome several negative elements in the economy contributing to stagnation. For example, given new capital requirements and large loan losses, commercial banks were reluctant to lend. Many businesses and consumers were burdened with high levels of debt.

This year, through July, the Fed allowed the nation's money supply (M-2) to actually shrink. Without adequate fuel, the economic expansion that started last year has been exceptionally weak. Real output has not grown at a 3 percent or better annual rate since the first quarter of 1989. With the income of many Americans not keeping up with inflation and others suffering from permanent layoffs, Governor Clinton successfully shifted the blame for the economic malaise to Mr. Bush.

Fortunately for Clinton, the M-2 measure of money (currency, checking accounts, and some savings accounts) has again grown a little since August. Even so, Clinton should visit with Mr. Greenspan in the days ahead to insist that the Fed provide adequate financing for a more vigorous economy. Greenspan will probably offer a number of technical excuses for the sluggish money supply and economy.

Clinton, however, should take no nonsense about monetary policy being unable to stimulate the economy. During the Great Depression, the Fed pushed short-term interest rates well under 1 percent, compared with about 3 percent today. And the economy responded.

If the semi-independent central bank does not provide enough money for a reasonable recovery today, Clinton should make monetary policy a public issue.

On the other hand, Clinton will not want the Fed to overdo an easier monetary policy. As a rule, it takes two or three years for excessive supplies of new money to produce faster inflation. A burst of inflation about the time of the next election could confirm public suspicions of a connection between Democratic administrations and fast-rising prices.

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