U.S., Allies Square Off Over Interest Rates
As finance ministers from more than 150 countries gathered for semiannual meetings that begin today, the United States and its major economic allies appear headed for a confrontation over global interest rates.
On the eve of the meetings, the two sides made it clear that they were sticking to their positions. “We want to see those interest rates down a little bit,” President Bush told reporters Thursday, adding that such a move would be “good for the world economy, including our own.”
Meanwhile, Karl Otto Pohl, the president of Germany’s central bank, stated flatly in an interview published in the Financial Times that cutting his country’s rates is “not on the agenda.”
The disagreement is the latest evidence that the United States and the other industrial powers are drifting farther apart in their approaches to an array of difficult economic challenges that confront them, some analysts say.
“We really do have to come to some common view about what the priorities are, what the patterns look like they will be,” said David Mulford, the Treasury Department’s undersecretary for international affairs.
The Bush Administration claims that the greatest threat now facing the world economy is the potential spread of a global recession and that an interest rate reduction could free up badly needed credit and spur economic growth. Mulford contended that real interest rates--rates adjusted for inflation--are at record levels, particularly in Japan and Europe.
Other leading powers, notably Germany, maintain that cutting rates risks inflation at a time when the world economy is poised for recovery. They insist that if the United States wants to lower interest rates, it should bring its own budget deficit under control.
“The conflict exists,” said economist Alan J. Stoga of Kissinger Associates in New York. “It is clear that the Germans and Americans at the least, and maybe the Japanese, have decided to go their own ways.”
However, the Administration has also been unable to persuade its own central bank. The Federal Reserve has indicated that it believes that interest rates have fallen low enough, at least for now.
The issue appears likely to arise in several meetings over the next few days. Policy-setting boards of the International Monetary Fund and World Bank will go to work today, but the most significant gathering will be a secret session Sunday of the powerful Group of Seven. It includes top economic policy-makers from seven leading industrial democracies: the United States, Germany, Japan, Great Britain, France, Italy and Canada.
The groups will be addressing serious economic problems in almost every part of the world. As Eastern Europe struggles to convert from socialism to market-driven economies, its reforms so far have failed to deliver prosperity, with many people even worse off than before. The Gulf War has left the poorer countries of the Middle East in dire need. Developing nations in Latin America and elsewhere continue sliding deeper into debt.
IMF officials, who released their semiannual economic forecast Wednesday, supported those who argue against reducing interest rates. Their predictions suggest that the world economy has neared the bottom of its slump and that the United States and other industrialized countries will begin to recover later this year.
If the IMF’s assessment proves true, research director Jacob Frenkel said, the allies should be leery of lowering interest rates because that could force prices higher just as the economy begins to rebound.
And if the economy is weaker than the IMF believes it is, Frenkel said, “U.S. rates in the marketplace will indeed be pushed downward--pushed by the marketplace.”
“In a nutshell, this is not the time for an activist monetary policy,” he added.
The disagreement over interest rates is only the latest sign that coordination among the world’s major economic powers has “disintegrated in recent months,” Stoga said. “In terms of big issues, it’s nonexistent.”
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