AS WE WERE SAYING last March 5, Bob Dole "has a big problem thanks to his Republican friend at the Federal Reserve." Almost since President Clinton's inauguration day, he and Fed chairman Alan Greenspan have formed what we described in that March editorial as a "bizarre, unexpected partnership" that has resulted in a "payoff" for both officials. Mr. Clinton refrained from criticizing the austere monetary policies of the Fed and Mr. Greenspan, in turn, did his bit to keep the economy upbeat and healthy.
The result, just six weeks before the Nov. 5 election, was yesterday's announcement that the Fed was passing up its last regular chance to raise interest rates before voters go to the polls. This confounded most Wall Street gurus. As economic more than political animals, they thought there was enough oomph in the longest of all post-war recoveries to require a rise in interest rates.
They were wrong. For once, short-range wisdom prevailed over the long view. Advocates of the latter focused on Mr. Greenspan's demand early in the Clinton era for a "pre-emptive strike" on inflation that brought seven consecutive increases in interest rates. Those with the more politically attuned short view noted that the Fed had lowered rates three times between July 1995 and January 1996 and then stood pat as the Republican Greenspan won re-appointment from Democrat Clinton.
In holding with his present hand, the Fed chairman was defying eight presidents of regional Fed banks who were pressing for an increase in the discount rate plus some agitation on his own board. Mr. Greenspan apparently was seizing on evidence of slowdown in the year's third quarter and inflation rates that were hardly budging despite the lowest unemployment rate in seven years.
Yet in our view, political factors are paramount. The "payoff" theory held. Yes, there may be an increase in short-term rates when the board meets again. But that will be on Nov. 13 -- eight days after the election.
Pub Date: 9/25/96