WASHINGTON — Federal Reserve Board Chairman Alan S. Greenspan disclosed Wednesday he had "objected quite strongly" to a recent attempt by a Reagan Administration official to prod the Fed into reducing interest rates. He warned that further pressure could provoke the Fed into the opposite course.
In testimony before the Senate Banking Committee, Greenspan said he had formally protested a letter written by Assistant Treasury Secretary Michael Darby in mid-January urging the Fed to pump more money into the economy. Greenspan said he was now "reasonably sure such an action will not occur in the future."
Fed officials said Greenspan personally telephoned Treasury Secretary James A. Baker III as soon as he received Darby's letter to protest what he regarded as an assault on the Fed's traditional independence from the Administration. The letter, officials said, was sent to Greenspan and each of the other five Fed governors.
Referred to Election
The letter openly referred to the coming election in arguing that the Fed should relax its money and credit policies. The Administration could expect lower interest rates to increase economic growth at a time when Republicans are seeking to retain the White House, but the Fed has resisted for fear that lower rates would also risk future inflation.
The letter also came only a few weeks before a crucial meeting of the Fed's policy-setting Federal Open Market Committee, which decides interest-rate policy. Fed officials consider committee meetings particularly sensitive and usually avoid public contacts and speaking engagements several weeks before such sessions.
Wednesday's disclosure underscored the growing friction between the Administration and the Fed, which jealously guards its integrity.
Just last week, Beryl W. Sprinkel, chairman of the President's Council of Economic Advisers, lambasted the central bank in the CEA's annual report to Congress, contending that the Fed had held too tight a grip on the money supply in 1987 and may have brought on an excessive slowdown of the economy. Administration officials said that Sprinkel's language was even more critical before Baker toned it down.
President Reagan, at his news conference Wednesday night, was asked whether he retained confidence in Greenspan in the face of recent criticism of the Federal Reserve by Administration officials.
"Yes I do," Reagan replied, adding that he would look into whether the Administration was putting undue pressure on the Fed. "I'm going to find out what all this is about . . . because nothing of that kind has been directed at me."
Greenspan told the Banking Committee he expected to have some policy differences with any Administration. But he warned that too much pressure from the executive branch might backfire by prompting the Fed to overreact.
"The only thing I hope that does not happen," he said, "is that the concern over political pressure gets so extraordinary that we end up taking actions" in the opposite direction just to prove that the Fed is still independent.
Markets Back Independence
The issue of the Fed's independence is more than just a matter of law. Financial markets want the central bank to maintain its integrity so that it can help counterbalance inflationary actions by the Administration or Congress.
Greenspan confirmed on Tuesday that the Fed had eased its grip on credit a few weeks ago, but he warned that the board was unlikely to let interest rates drop much further unless economic growth falls short of its relatively modest expectations.
When asked by Senate Banking Committee Chairman William Proxmire (D-Wis.) on Wednesday about the Darby letter, Greenspan said that as best as he could determine, Darby "was not aware of the implications" of what he was doing.
Administration officials said that Darby, like Sprinkel, is a monetarist--an adherent of a school of economic thought that contends that the most critical factor in shaping the course of the economy is the amount of money available in the economy.
Most Vocal Critics
Monetarists traditionally have been among the most vocal critics of Federal Reserve policy.
Despite his rank as assistant Treasury secretary for economic policy, Darby is not regarded as a senior economic policy-maker in the Administration. A senior official said at the time that Darby was not acting on behalf of the Administration when he wrote the letter.
Proxmire told Greenspan that he thought it was "both deplorable and counterproductive for the Reagan Administration to pressure you as much as they have in recent months."