Clinton Could Stack Fed With Democrats
FEDERAL RESERVE WATCH
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President Clinton, who has shown an ability to work with Federal Reserve chief Alan Greenspan - a Republican - now has the opportunity to appoint two new members to the important seven-member economic and regulatory board.
Last week, Lawrence Lindsey, an appointee of President Bush, notified the White House he would be leaving after five years as a governor to work in the private sector. This follows Mr. Clinton's decision to tap another governor, Janet Yellen, to head up the Council of Economic Advisers.
The vacancies come at a particularly sensitive time for the US economy. There are some signs the economy may be too ebullient. On Friday, the government reported employment in December increased by 260,000 - this is above the 150,000 rate many economists consider appropriate given the 5.3 percent unemployment rate. The news led to a roller coaster ride for stock prices on Wall Street, which ultimately decided the economic statistic was not likely to upset the bull market yet.
"The economy is on the cusp of potential overheating. We may soon see the first potential rise in inflation," says John Burgess, a managing director on Bankers Trust bond desk in New York.
Despite Mr. Burgess's concerns, most Fed watchers do not expect the Fed's Open Market Committee - which guides short term interest rates - to make any moves when it meets on Feb. 4 and 5. Last week, Alice Rivlin, the board's vice chairman (also a Clinton appointee), described the economy as not too hot or too cold.
The strength in employment is likely to be mirrored in the estimate of the nation's gross domestic product for the fourth quarter. Economists now believe the Commerce Department will report that the nation's GDP grew at about 3 percent, up from 2.1 percent in the third quarter.
"By March, they may have to do something. The economy won't need to get knocked over the head, but they may have to raise rates," says Lyle Gramley, a consulting economist at the Mortgage Bankers Association in Washington. Mr. Gramley, a former Fed governor, anticipates about a one-fourth of a percentage point hike. "They will have to be a little cautious because of the vulnerability of the stock market," he says.
By March, Clinton may have announced his nominees. They will need Senate confirmation. However, Scott Grannis, an officer of Western Asset, which runs $25 billion in bonds from Pasadena, Calif., does not expect much input from the new members.
"Greenspan runs a very tight ship," he says. A handful of board members have not stayed their full term. "This board is eating them up and spitting them out." Mr. Grannis says any new members will have to spend years making names for themselves. "You can't be someone with a great deal of independence or aspirations," he adds.
Most Fed watchers expect one of the nominees to be a minority or a woman to replace Ms. Yellen. Clinton must also be sensitive to where the nominee hails from. Federal rules require that no two governors come from the same Fed district.
Clinton's last two appointments have been economists. Charles Plosser, dean of the William Simon School of Business in Rochester, N.Y., would like to see that trend continue. "I don't want a banking economist," says Mr. Plosser, who serves on the Shadow Open Market Committee, a group of economists who meet regularly to discuss monetary issues. "I wish the Fed would spend less time on banking."