Bush urges Fed to further cut interest rates


WASHINGTON -- President Bush said yesterday that the Federal Reserve Board could mitigate the recession "significantly" by taking further action to lower interest rates.

In an optimistic economic report to Congress, the president predicted that the current recession will be "short and shallow," with interest rates and inflation declining.

Strong economic growth through the mid-1990s should follow the downturn, according to the president's report.

Mr. Bush blamed the central bank's tight monetary policy for contributing to a weak economy, which finally fell into a recession last year when oil prices soared after Iraq invaded Kuwait.

"It is important that the Federal Reserve sustain money and credit growth necessary for the maintenance of sustained economic growth, especially during an economic downturn," the president said, continuing his effort to persuade the Fed to cut interest rates.

Amplifying on that issue, the president's chief economic adviser, Michael J. Boskin, told the congressional Joint Economic Committee that though the Fed has "moved aggressively" in recent months to lower interest rates, further rate cuts are warranted to revive the economy.

"There is some room for interest rates to decline further, and I am sure the Fed will act accordingly," Mr. Boskin said in response to persistent questioning by Representative Lee H. Hamilton, D-Ind.

Despite the forecast of a midyear end to the recession, Mr. Boskin said the unemployment rate, which was 6.2 percent last month, would climb to 6.9 percent in coming months, with 600,000 more workers left jobless.

Mr. Boskin, who joined the president in urging the Fed to lower rates as the economy weakened last year, said that if the Fed had reduced rates in the first half of 1990, it would have provided "more of a cushion" to the economy when the higher oil prices struck.

"Whether the economy could have avoided a recession [with an easier monetary policy] is a 50-50 proposition," he said. "I can't make a definitive statement."

After starting a more restrictive policy during the spring of 1988 to combat inflation, the Fed gradually lowered rates in the last half of 1989. But during the first six months of 1990, when the economy was growing at a sluggish rate, the federal funds rate -- the interest rate that banks charge each other for short-term loans -- was left unchanged at 8.25 percent.

The effect of the steady rate was an actual tightening of credit because, at the time, the money supply was growing little, if at all, and banks were restricting their lending policies.

Responding to the stark signs of a recession, the Fed started to ease credit last July and moved dramatically with several further rate cuts starting in October.

By early this month, the fed funds rate had been reduced in stages to 6.25 percent, the lowest level in three years.

The Fed's discount rate, which it charges commercial banks, was cut to 6 percent early this month from 6.5 percent.

In a report that accompanied the president's message to Congress, the Council of Economic Advisers said the Fed recently had taken action that "will help mitigate the current recession."

It usually takes four to six months for Fed policy changes to be reflected in economic performance, but some economists are questioning whether the recent easing of monetary policy will bring about a economic recovery because the fragility of banks has limited their lending even to their most creditworthy customers.

President Bush's report omitted any new spending policies to relieve the recession. Instead, he concentrated on long-term measures to buttress the economy -- including tax incentives for savings, a stronger highway system, improved elementary and secondary schools, better health care for the poor and a lower capital gains tax to stimulate investment.

"As the nation proceeds into the 1990s, it is important to remember the simple secret of America's economic success in the 1980s: a government policy that allowed the private sector to serve as the engine of economic growth," Mr. Bush said in his report.

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