Clinton And Greenspan: Is An Explosion Coming?

Soon after Bill Clinton took office, Alan Greenspan got the seat of honor at the State of the Union address--next to First Lady Hillary Rodham Clinton. These days, Clinton wants to put the Federal Reserve chairman in the hot seat. The President has avoided public attacks on the central bank's repeated rate hikes. But when asked about them, Clinton's face betrays his feelings. "You get the sense that he's biting his tongue so hard it's hurting," says a Fed official.

That's an understatement. In private, senior Administration aides confide, Clinton has raged about the threat a sharp rise in rates poses to the economy's health. Some "explosions," as one adviser calls them, can be heard down the hall from the Oval Office. Top advisers fear another hike or two could trigger a nasty public spat between the White House and the Fed.

market turmoil. Why? Clinton is an old-fashioned Southern populist who thinks a small rise in inflation is a fair trade-off for strong growth. And he's frustrated that his efforts to crow about positive trends in the economy are being overshadowed by the Fed moves and the resulting financial-market turmoil.

But Clinton has been convinced by top advisers that it's better for the Fed to slow the economy now than wait until the 1996 campaign approaches. They've also made him keenly aware that picking a fight with Greenspan would be a sure loser. When attacked by the White House, the central bank often asserts its independence by acting contrary to a President's wishes. Its most persistent bashing came from George Bush, obviously to no avail.

The only recent President to avoid public feuds was Gerald Ford. His chief White House economist--Alan Greenspan--advised suffering in silence. Peddling that same counsel to Clinton are Treasury Secretary Lloyd M. Bentsen, National Economic Council Chief Robert E. Rubin, and Deputy Treasury Secretary Roger C. Altman. All are fiscal moderates with Wall Street connections and ties to Greenspan: Bentsen plays tennis with the Fed chairman. Rubin, the former co-chairman of Goldman, Sachs & Co., belongs to the same country club. Altman, a former investment banker, knows Greenspan from the A-list dinner-party circuit. Greenspan is pleased that his friends have kept Clinton off his back.

The three wise men at first persuaded Clinton that small Fed rate boosts to preempt inflation would restrain long-term rates and keep the economic expansion on track. But when the Fed's moves were greeted instead with a huge runup in long rates from bond traders who wanted tougher action, Clinton challenged his advisers. A White House aide recalls him grumbling: "Where's the fall in long-term rates?" and chiding his team for being too conservative. "Whose side are you on anyway?" he asked playfully.

Since May 17, the Administration has been breathing more easily: Bond yields finally fell, in response to the Fed's half-point rate hike and hints of no further moves for a while. But that respite could be short. Rising commodity prices have triggered new inflation fears on Wall Street. And if the government's monthly employment report on June 3 shows strong job gains, Greenspan could be forced to act sooner than he planned.

Clinton hopes his two Fed nominees, White House economist Alan S. Blinder and academic Janet L. Yellen, will discourage additional rate hikes. But Blinder, feeling pressure to prove his anti-inflation mettle, may not deliver.

Clinton's advisers fear that he won't hold his tongue much longer. That may only stiffen Greenspan's resolve and scare bond traders into driving long-term rates higher still. And the President would quickly discover that the only thing worse than silence is speaking his mind.

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