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US Federal reserve advisor, David Hale
"A very, very critical time"
 real 28k

Monday, 18 December, 2000, 12:23 GMT
Bush courts Mr Greenspan
George W Bush must win over the Fed chairman
George W Bush must win over the Fed chairman
It is not surprising that George W Bush made a visit to Alan Greenspan his first priority on arriving in Washington.

The chairman of the US central bank, the Federal Reserve, has a powerful influence on US economic policy, and establishing a good relationship with Mr Greenspan is a key priority for Mr Bush.

The need for a good relationship is heightened by potential political and economic tensions between the two men.

With the US economy slowing sharply after ten years of unbroken economic growth, opinion is divided about how to prevent the US sliding into a recession.
The Fed is worried by high oil prices
The Fed is worried by high oil prices

The Bush team has indicated that they believe a slowing economy makes the case for their huge $1,300bn tax cut even stronger.

They say that it could help stimulate the economy.

The Fed has taken a different view, however.

It is worried that an economic slowdown could reduce the size of the projected budget surplus - and has urged the adminstration to use any surpluses to reduce the size of the government's debts.

And it it still worried by the inflationary threat posed by high oil prices and tight US labour markets.

With the Fed's latest interest rate decision due on Tuesday, observers will be closely watching to see whether the central bank will be changing its "bias" - which currently has it emphasising the inflationary danger and leaning towards more rate rises if necessary.

Personality clash

The argument also has its personal element, as Mr Bush's chief economic advisor is Lawrence Lindsey, a former member of the Fed's policy making Open Market Committee - who often clashed with Alan Greenspan.

During the election, relations worsened after Mr Lindsey appeared to claim that Mr Greenspan supported Mr Bush's economic plans - which Mr Greenspan, who vigorously defends the independence of the Fed, denied.

Mr Lindsey is an advocate of "supply-side" economics, and argues that big tax cuts leads to increased productivity for the US economy, which makes it easier for it to grow without inflation.

Mr Lindsey also reportedly aspires to replace Mr Greenspan when his term of office expires in four years time.

Mr Greenspan - who was reappointed by Mr Clinton in the spring - will be 78 when his term expires, although he will still have two more years as a member of the Fed's board of governors.

Mr Bush will also have a chance to appoint two new members of the Fed's board, and he is expected to name individuals who are more inclined towards interest rate cuts than Mr Greenspan.

But he is unlikey to overturn Mr Greenspan's control of the Fed's Open Market Commitee, which sets interest rates, and is made up of twelve members, including some of the chiefs of the Fed's regional banks.

Problems with his father

Managing the relationship with Mr Greenspan proved to be difficult for Mr Bush's father, and is widely believed to have contributed to his defeat by Bill Clinton in 1992.

Mr Greenspan refused to lower interest rates in 1991 despite pressure from the Bush adminstration, who was stung by Mr Clinton's charge that "it's the economy, stupid".

As a result, the economic recovery arrived too late to help Mr Bush's re-election hopes.

Mr Clinton, in contrast, began his term in office by cultivating Mr Greenspan, much to the distress of his more liberal advisors like Labor Secretary Robert Reich.

He built a close working relationship with Mr Greenspan, as did his Treasury Secretary Robert Rubin, based on two policies of a strong dollar (which helped keep down inflation) and support for debt reduction.

Mr Bush's reported choice of aluminium executive Paul O'Neill, a strong advocate of tax cuts, as his new Treasury Secretary would also increase tensions with Mr Greenspan.

Mr Greenspan is, at least, a Republican and is likely to share some of Mr Bush's commitment to free market solutions to economic problems.

But coordinating policy to avoid a clash between tax cuts and interest rate increases is likely to be the key to the US economy avoiding a hard landing.

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See also:

14 Dec 00 | Business
Tax cuts and free trade
08 Dec 00 | Business
US unemployment rises
27 Oct 00 | Business
How to spend the surplus
16 May 00 | Business
US interest rates up 0.5%
04 Jan 00 | Business Basics
Alan Greenspan, scourge of the markets
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