Bush Set to Attack Fed if It Risks a Recession

President Bush is becoming increasingly worried that any further efforts by the Federal Reserve to contain inflation by raising interest rates might also produce a recession, officials familiar with the President’s thinking said Monday.

Bush has decided that he will attack the Federal Reserve publicly, according to these sources, if interest rates rise so high that they threaten an economic downturn.

However, especially after the latest jump in wholesale prices, Bush reportedly understands the Fed’s concern about inflation.

And, in part to ward off complaints that the Administration overstated its criticism of the Fed earlier this year, the sources said, he is likely in the immediate future to speak out in support of the Fed’s efforts to stem economic growth by tightening credit.

Fed officials, who have tightened credit over the last year by enough to push short-term rates up more than 3 percentage points, have indicated recently that they would like to postpone any further interest rate hikes to see if the actions already taken will be successful in dampening inflationary fires.

But both the White House and the Fed were jolted by last Friday’s report that, in February, wholesale prices rose by 1% for the second month in a row. Inflation at that level, a 12.6% rate if it continues for a full year, also sent Wall Street reeling, not only on Friday but on Monday.

Last year, wholesale prices rose roughly 4%.

Administration officials are bracing for today’s report on consumer prices, which is expected to show about a 0.5% increase for February. If the consumer price index is up significantly more than that, however, Wall Street could be knocked for another loop and the Fed would be under much greater pressure to tighten credit another notch.

The Dow Jones average dropped 29.64 points Monday to close at 2,262.50. (Details in Business.)

Although price increases are expected to moderate in the months ahead, the recent signs of escalating inflation seem to have vindicated the Fed’s repeated efforts to resort to high interest rates in its campaign to cool the economy and contain inflation.

Publicly, Bush Administration officials were careful Monday to avoid any criticism of the independent Federal Reserve, but they sought also to play down inflation fears.

Treasury Secretary Nicholas F. Brady said that, despite the recent inflation figures, other economic indicators “that are equally important” are pointing to a moderation of inflationary pressures.

Praises Greenspan

But, when pressed during a morning television interview on whether the Fed should back off from its policy of pushing interest rates higher in response to signs of inflation, Brady said:

“The Fed has got a very competent chairman in Alan Greenspan . . . . He has to do what he has to do.”

He added that, if the Administration is successful in its goal of reducing the federal deficit, “that will take care of a lot of the worries.”

At the same time, Michael J. Boskin, Bush’s chief economic adviser, told reporters that the 1% back-to-back wholesale price hikes are aberrations caused by sharp increases in food and oil costs. “The inflation numbers of spring and summer will be lower than what we have seen in the last couple of months,” Boskin said.

Inflation Discounted

And, in case anyone still misunderstood the message, White House Press Secretary Marlin Fitzwater stated: “At this point, we see no long-term rise in inflation.”

Such statements represent de-escalation from a series of Administration statements earlier this year challenging the steady increase in interest rates engineered by the Fed.

Bush’s own campaign of public criticism of the Fed’s anti-inflation drive began less than a week after he took office from former President Ronald Reagan, who had personally avoided public criticism of the central bank, even during the early years of his Administration, when high interest rates knocked the economy into a deep recession.

“I don’t want to see us move so strongly against fear of inflation that we impede growth,” Bush said in late January, only a day after Greenspan had told Congress that current inflation rates “clearly are too high and must be brought down.”

Disagreement Played Down

In the days that ensued, Administration officials--although playing down any sharp disagreement with the Fed--echoed Bush’s remarks. “I personally don’t believe that the inflationary threat is as great as some there believe it is at the moment,” Budget Director Richard G. Darman said late last month.

Darman, who is counting on a combination of strong growth and lower interest rates to help carry out Bush’s vow to balance the budget by the end of his first term without a tax increase, warned against “a policy that is oriented toward nothing but monetary tightening.”