Only five weeks into the new presidency, the Federal Reserve Board is teaching the Bush administration a painful lesson. It doesn't pay to get into a fight with the folks who set interest rates.Since taking office, President Bush has been suggesting the Fed not choke off the economic expansion by pushing interest rates higher.
The president got the Fed's response Friday. And it was just the opposite of what he had hoped.
The central bank raised its discount rate, the fee it charges for loans to commercial banks, to 7 percent, its highest level in three years.
A boost in the discount rate is the most dramatic signal the board can send of its intentions to push a broad range of interest rates higher in an effort to slow an overheated economy.
Three times since Jan. 20, Bush has brushed away worries about inflation and said he didn't see the need for the Fed to give the economy a dose of tighter credit. Rather, he said, the central bank should worry more about economic growth because he did not see signs that inflation was getting out of hand.
Those comments were echoed Thursday by the administration's chief economic spokesman, Treasury Secretary Nicholas Brady, who said central bank policy-makers were anticipating too much.
While disputes between the central bank and a president are not uncommon, some members of Congress were taken aback by Brady's apparent disregard for the threat of inflation, especially given the barrage of bad news on the price front.
Labor costs, wholesale prices and consumer prices have all been headed higher. The government reported Wednesday that retail prices shot up last month at their fastest pace in two years.
What concerns many observers is that the Fed may be forced to boost interest rates higher and more quickly than it had intended to dispell doubts in financial markets about the central bank's resolve to fight inflation because of the administration's verbal sniping.
Federal Reserve Chairman Alan Greenspan, a longtime Republican strategist and close friend of Bush, has gone out of his way to emphasize the central bank's political independence even though he and the other six board members were all appointed by former President Reagan.
Recognizing the dangers of a public dispute with the Fed, Bush budget director Richard Darman took the unusual step on Friday of telling his colleagues in the administration to cool it.
Darman's unspoken fear is that foreigners, who finance an increasing share of America's borrowing needs, might suddenly decide to dump their dollar-denominated assets because of fears that the Fed had responded to political pressure and abandoned its inflation-fighting campaign.