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Administration Had Hinted at Effort to Keep Dollar Stable : U.S. Won't Pressure Bonn to Cut Interest Rates

February 05, 1988|ART PINE and TOM REDBURN | Times Staff Writers

WASHINGTON — The Reagan Administration will not ask West Germany to reduce its interest rates to help keep the dollar stable in the face of declining interest rates in the United States, a senior Administration official said Thursday.

The Administration had hinted a few days ago that it might consider such a move but apparently has abandoned the idea following a meeting Wednesday between Treasury Secretary James A. Baker III and West German Finance Minister Gerhard Stoltenberg.

"We're not after them (the West Germans) on anything," the U.S. official said Thursday. He said that included the Bundesbank, West Germany's central bank, as well as the Kohl government.

The Administration's earlier suggestion that it might ask West Germany to reduce its interest rates stemmed from fears that if U.S. interest rates alone were to drop, investors might be attracted to the higher rates in West Germany, sending the dollar into another decline.

The Administration has been quietly pressuring the Federal Reserve to allow interest rates to fall to counter recent signs of weakening in some sectors of the U.S. economy, such as housing. The Fed's policy-making Federal Open Market Committee is scheduled to meet next week to decide whether to ease credit conditions.

The U.S. decision not to press West Germany on the interest rate issue apparently helped avert any serious controversy in the meeting between Baker and Stoltenberg. A public squabble between the two over economic policy differences and the resulting investor anxiety helped fuel the Oct. 19 stock market crash, market analysts have said.

It was obvious this week that the two men were determined to avoid repeating that debacle. Although the Administration--trying to stimulate foreign consumption of U.S. goods--clearly is unhappy with the sluggish pace of the West German economy, Baker took pains to avoid even mildly criticizing the West Germans.

Stoltenberg also met briefly here with Federal Reserve Board Chairman Alan S. Greenspan, Michel Camdessus, managing director of the International Monetary Fund, and Barber B. Conable Jr., president of the World Bank. He is scheduled to return to Bonn tonight.

U.S. and West German officials said Stoltenberg's visit to Washington appeared to be motivated partly by political considerations in West Germany, where he has been criticized for the impact of the falling dollar on the nation. The declines have the effect of making U.S. goods cheaper and West German ones more expensive on world markets.

The U.S. official conceded that that had played a significant part in Washington's decision not to press the West Germans harder. "Political realities are that they can't do anything else," he said.

Latest forecasts show that the West German economy is likely to grow only by 1.5% this year--far below what is needed to keep the European economy growing rapidly.

Last Dec. 22, West Germany and the United States joined with five other major industrial nations in pledging to keep the dollar's value stable to reassure investors worldwide. With central banks intervening to buy dollars at key points, the dollar has remained relatively calm.

The U.S. official said Thursday that the Administration is convinced that the U.S. economy is progressing well in shifting from a consumer-led expansion to one that is being buoyed by export sales and that it does not expect to see a recession soon. "The adjustment is working," he said.

The official also denied that the Administration has shifted its position on the Third World debt problem to advocate across-the-board debt relief for debtor countries rather than adhering to the case-by-case approach that it has embraced for the past six years.

That viewpoint was echoed in testimony before Congress by David Mulford, assistant secretary of the Treasury, who told a House banking subcommittee that the Administration opposes proposals on Capitol Hill that would grant more generalized debt relief.

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