Commentary: The Fed: Don't Mess With Success, Mr. Clinton

Jimmy Carter, Ronald Reagan, and George Bush all came to fear--and sometimes loathe--the Federal Reserve. Their shared belief was that the central bank was willing to sacrifice their Presidencies in the battle against inflation. Yet as Bill Clinton settles into his second term, he's enjoying a happy marriage with the Fed that may well last another four years.

Sure, it's easy to love the Fed when the economy keeps humming along with both low inflation and low unemployment. But Clinton has had a hand in bringing about that pleasant outcome by making a series of appointments that have created one of the strongest Fed boards in recent years. The Clinton forces on the Fed--all intellectual heavyweights--have had a subtle but significant influence on Chairman Alan Greenspan: They're neo-Keynesians who, at a minimum, have given the Fed chief the support he has needed to fend off calls for higher interest rates in the face of tight labor markets. At most, the Clintonites may have influenced his thinking about how the New Economy operates. Indeed, Greenspan signaled Congress on Jan. 21 that he intends to continue standing pat for now. He noted that although wage pressures still lurk, he sees few "inflationary tensions."

While some past boards have been packed with obscure appointees, Clinton has recruited some leading lights of economics--most notably, Vice-Chair Alice M. Rivlin and her predecessor, Alan S. Blinder. Governor Janet L. Yellen--a former University of California at Berkeley economist--doesn't have as high a profile, but her research into labor markets is regarded as seminal. Before joining the Fed, Governor Laurence H. Meyer was considered one of the best private forecasters.

None of these choices is considered a traditional liberal who believes higher inflation is a fair trade-off for stronger growth. "The President isn't naming ideologues who just want to let the economy zip along," says a Clintonite. For that, Clinton might thank the GOP-controlled Senate, which has discouraged him from nominating such liberals as Wall Street financier Felix Rohatyn, who pulled out when fierce GOP opposition surfaced.

Clinton's challenge now is to appoint more Fed governors who are as qualified as his first picks. He created one vacancy by nominating Yellen to chair the White House Council of Economic Advisers. The Jan. 9 resignation of Bush appointee Lawrence B. Lindsey creates a second. Moreover, Governor Susan M. Phillips' term expires next January, and the lone Reagan holdout, Edward W. Kelley Jr., is ending his 10th year on the board, prompting Fed watchers to note that Clinton might have the rare chance to appoint all seven board members--a feat matched only by Reagan.

While Greenspan still holds sway over the course of Fed policy, the board's composition has an impact on his thinking. When Reagan-Bush governors dominated, Greenspan launched a preemptive strike against inflation, raising rates before there were clear signs of climbing prices. Now, the Clinton faction has helped warm the Fed chief to the notion that the economy is operating differently, if just for this business cycle.

PERSUASIVE. Its mantra: Corporate America's heavy investment in computers and technology has pushed productivity far above its measured rate, allowing the economy to grow faster without igniting inflation. The Clintonites also contended that downsizing and global competition have kept a lid on wages. Greenspan found the argument so persuasive that he fended off a push by Fed regional bank presidents last summer for a rate hike. In hindsight, Greenspan's call looks shrewd.

The Clintonites' biggest contribution to Fed policy may be their push for "opportunistic disinflation," an idea championed by Blinder that now appears to be the Fed's modus operandi. The theory holds that the Fed should make the most progress against inflation during recessions--and be content to contain inflation during expansions. "The concept was Blinder's legacy," says David M. Jones, chief economist for Aubrey G. Lanston & Co.

As he fills the new Fed vacancies, Clinton should resist the temptation to use his rising public-approval ratings to try to get easy-money ideologues or political cronies past GOP lawmakers. Sticking with thoughtful moderates is the best way to keep the economy healthy and his relationship with the Fed a happy affair.

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