WITH the nation's economy stumbling and the 1996 political campaigns kicking up, analysts are focused on the Federal Reserve Board and its willingness to help power economic growth through the upcoming election.
The next several weeks will largely determine the Fed's role. Tomorrow, the Federal Open Market Committee (FOMC), the monetary-policymaking arm of the central bank, convenes for its first two-day session of the year, when many Fed watchers expect it to cut interest rates by at least a quarter of a point.
And, over the next month, the Clinton administration must fill the Fed's top two positions, with the option to fill a third empty governor's slot. The vice chairman's seat will be vacant by Feb. 1, and on March 2 the chairman's current term expires.
Fed watchers are all but certain that Fed chairman Alan Greenspan, who serves at the pleasure of the president (subject to Capitol Hill's approval), is here to stay.
One reason to expect Mr. Greenspan's renomination to a third term: He has the blessing of Senate Banking Committee Chairman Alfonse D'Amato (R) of New York, who will play a key role in the confirmation process.
This week's departure of Alan Blinder, the Fed's vice chairman, "is the clear signal that Greenspan will be reappointed as chairman," says Alan Meltzer, economics professor at Pittsburgh's Carnegie Mellon University. Mr. Blinder, a Clinton appointee, "would have only stayed had he been guaranteed the No. 1 spot," says Mr. Meltzer, chairman of the Shadow Open Market Committee, a group of private Fed experts who analyze and anticipate the central bank's movements.
In line to replace Blinder is investment banker and Clinton crony Felix Rohatyn, managing director of Wall Street's Lazard Freres & Company. Like Blinder, Mr. Rohatyn advocates lower interest rates as a way to stimulate the economy. Far from a fiscal conservative, Rohatyn has favored big government stimulus packages to steer the country out of slow growth.
Rohatyn's financial expertise notwithstanding, he will wield little influence this year, asserts a top Greenspan adviser. "It takes six to eight months for a new governor to come up to speed," he says. Rohatyn's "impact will be less than he expects," Meltzer agrees, given the reservoir of respect Greenspan has earned from his Fed colleagues and his strong rapport with Wall Street.
Even if forces favoring a reduced interest rate prevail at the Fed, the customary six- to 18-month lag in investment-spending response would leave little chance of an economic boost this year, counters William Dunkelberg, chief economist of the National Federation of Independent Business. He expects the FOMC to ease interest rates by an initial quarter of a point, if not this week then by its February meeting. "And then, they'll lie low - they don't want to be accused of being political."
The central bank has already crossed that line, says Walker Todd, a former official with the New York and Cleveland Fed banks. "Green-span has found a way of making himself acceptable to the administration in power." Mr. Todd says Clinton's cozying up to the central bank goes back to his inaugural State of the Union address, when the Fed chairman was invited to sit next to Mrs. Clinton (a seat occupied by Elie Weisel during Clinton's State of the Union address last week).
Mutual admiration society
Since then, the White House-Central Bank relationship - acrimonious during the Bush administration, as when Republicans blasted Greenspan for lowering interest rates too little, too late - has developed into a sort of mutual admiration. This has been reinforced by Greenspan's endorsement of the administration's 1993 deficit-reduction plan and subsequent budget-balancing efforts.
The Fed chairman has also gone to bat for the White House during times when the president and his emissaries seemed to have struck out. Last week's "photo opportunity" of Greenspan lecturing [House majority leader] Dick Armey (R) of Texas "on the dangers of the GOP refusing to raise the debt ceiling and pushing the US government into default" reinforced White House appreciation for the Fed chairman, Meltzer says.
"Because [Treasury Secretary] Bob Rubin has little credibility among Republicans on Capitol Hill, as in the case of Mexico [when, during the peso crisis, the Fed chairman was a constant presence in the Capitol lobbying on behalf of a US government bailout package], Greenspan is carrying the administration's water on his shoulders," Meltzer says.
At a lunch meeting Jan. 26, Secretary Rubin said that strong White House-Fed ties were part and product of sound economic policies.
Some observers say the Clinton White House has been wise to refrain from publicly airing criticisms of the central bank, saving confrontations, if they occur, for private meetings.
It's a matter of practicality, says Mr. Dunkelberg, given that "fiscal policy has become paralyzed [by deficit-reduction plans] and the Fed has committed itself to long-term inflation control." The Fed is not interested in fixing the unemployment rate over the next three months but in how the economy will perform over the years ahead, he says.