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latimes.com: Bush, Fed: can they get along?

latimes.com WASHINGTON (Los Angeles Times) -- President-elect George W. Bush's post-victory swing through Washington on Monday included the first stirrings of friction in almost a decade between the nation's two most powerful economic policy-makers--the president and the chairman of the Federal Reserve Board.

Bush emerged from a breakfast meeting with Fed Chairman Alan Greenspan to declare: "I talked with a good man right here." But behind the ritual praise, some saw the outlines of nascent disagreement over tax cuts, the nation's economic condition and perhaps even the question of who is in charge of fixing it.

With the president-elect warning of economic trouble ahead, the Fed will get its first chance today to show how seriously it takes his prognostications. Its policy-making Federal Open Market Committee had been expected to say it no longer is worried as much about inflation as about a slowdown.

But the panel might actually cut interest rates. Such a move would be widely viewed as signaling both that the economy is slowing faster than the Fed had expected and that the central bank can take care of the problem on its own. Bush spent much of Monday touting his preference for the massive tax cuts he advocated during the election campaign.

"Any time growth decelerates sharply, you get an increase in the natural tension between the White House and the Fed and we're seeing that kind of deceleration," said Mickey D. Levy, chief economist of Bank of America Securities in New York. "Both sides are going to have to work very hard to understand each other's motives and objectives."

A rift of almost any sort between Bush and Greenspan would stand in marked contrast to the near-lovefest that has prevailed between the two offices during the Clinton years. At the extreme, it could produce policy mix-ups that damage investment and aggravate the economic slowdown.

Relations were last sour in the early 1990s, when aides to President George Bush, the president-elect's father, accused the Fed chairman of failing to act quickly enough to forestall the 1990-91 recession, which is widely thought to have cost the elder Bush a second term.

"His father hammered the Fed harder than any administration in recent times," said Lee Hoskins, who sat on the Federal Open Market Committee as president of the Cleveland Federal Reserve Bank in the late 1980s and early 1990s.

In addition to meeting with Greenspan on Monday, the younger Bush sat down with Republican and Democratic leaders of Congress and had lunch with a new candidate for Treasury secretary, just-retired Alcoa Chairman Paul H. O'Neill. The former metals company executive is said to have leapfrogged several big-name Wall Streeters because of his experience as a budget agency official in the Nixon and Ford administrations.

Some veteran Fed watchers cautioned that it is too early to tell how things would develop between the new president and the long-serving Fed chairman. They pointed out that there are substantial pressures on each man to make the relationship work.

"Greenspan doesn't want this to go badly," said former Fed governor Lyle E. Gramley, "and, if Bush has any brain in his head, he'll look back over the last eight years and say good things happen when you have good relations with the Fed."

Nevertheless, several hairline cracks have already appeared, starting with each side's assessment of the nation's economic health.

In a move that has left some economists and Fed watchers troubled, Bush and his vice president, Dick Cheney, have started to warn that the economy may be slipping into recession.

Although the warnings are almost universally viewed not as shots at the Fed but as political ammunition for a big tax cut, some analysts worry that they could dampen consumer confidence and make it harder for the central bank to pursue its strategy of slowing, but not stalling, the economy.

"If I were the new administration, I would not be throwing the alarms about downturn," said Charles I. Plosser, a University of Rochester Business School dean who co-chairs a widely respected economic group, the Shadown Open Market Committee. "You don't want to box [Greenspan] in."

Analysts have also been caught short by what the new president sees as the principal source of the economy's troubles: a looming energy crisis.

Soaring natural gas prices have pushed California to the edge of electricity blackouts and triggered emergency federal powers to keep supplies flowing.

But a variety of energy experts said that the state's problems are the result of an unusual confluence of forces not easily fixed by Washington. They pointed out that the price of other fuels has already retreated from recent highs.

Several questioned how effectively Bush and Cheney, both former oil company executives, could tout a policy of more domestic exploration that would almost certainly benefit former business partners.

"It's always tempting when energy prices go up to argue we should do something," said Severin Borenstein, an energy economist at UC Berkeley. "I'm not sure there is much the government can do to make things better and there are a lot of things it can do to make things worse."

Fed officials have acknowledged in speeches in recent weeks that the economy is slowing, maybe even more quickly than expected. But they--and most outside economists--have maintained that it would keep growing. Greenspan, while noting recent energy price hikes, has suggested that they are not a serious threat to the economy.

In addition to differing over the state of the economy, the two sides have the makings of a disagreement over the president-elect's proposed use for a substantial fraction of Washington's burgeoning budget surplus--a 10-year, $1.3-trillion tax cut.

In speeches and congressional testimony all year, Greenspan has said that he would like to use the surplus to pay down the national debt. He has said that he would favor a tax cut only if necessary to keep Congress from spending the extra money.

But Bush has not wavered, even when campaign polls showed his tax cut to be not particularly popular.

Some analysts said that the recent economic slowdown is improving the case for a substantial tax cut and diminishing the likelihood that the Fed would oppose it. In addition, they said, the fact that Congress just passed a budget for the current fiscal year that outstrips its own spending targets by $40 billion may help convince Greenspan that the time is ripe for a cut.

"The incoming administration appears to have had a reasonably good take on which way the economy was headed," said Allen Sinai, chief economist with Decision Economics Inc. in New York. "They look prescient."

But veteran Fed watchers said that Greenspan is unlikely to support a tax cut of the size Bush is pushing. They warned that in return, the central bank might refuse to cut interest rates as much as it had planned to protect against a resurgence of inflation.

"There could be substantial friction between the new administration and the Fed chairman on the issue of tax cuts," said David M. Jones, chairman of Aubrey G. Lanston & Co., a New York bond house.


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Tuesday, December 19, 2000

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