http://www.latimes.com THE RACE TO THE WHITE HOUSE White House Has Wary Eye on Fed's Plans One small interest rate increase shouldn't hurt much, but more won't help Bush, experts say. By Janet Hook Times Staff Writer
July 1, 2004
WASHINGTON - Like his father 12 years ago, President Bush is facing reelection at a time when the economy is rebounding - but many voters haven't noticed.
So it was not welcome news when the Federal Reserve Board announced Wednesday that a key interest rate was rising, and might continue to creep up in the coming months, potentially saddling many consumers with higher mortgage rates and larger credit card debt between now and election day.
Analysts say the Fed's action will, by itself, have little immediate political effect on Bush's reelection prospects; the quarter-percent increase was small and widely anticipated by the markets, consumers and the White House. Even before it was announced, Bush's spokesman was ready to argue that rates had to be raised because the economy was growing so rapidly.
"It's not unexpected that, as the economy continues growing stronger, that interest rates may rise some," said White House Press Secretary Scott McClellan. "And that's not something at this point that is a concern. It's just a reflection that the economy is growing stronger, and that people are finding work."
Still, the prospect of a series of rate hikes - and the end of a long era of stable, rock-bottom rates - dashed administration hopes that all economic news between now and election day would be rosy. And it puts the administration in the awkward political position of arguing that the rate increase is a good thing because it is a sign of the economy's strength.
"Economists know that's true. However, people's mortgage rates are going up; credit card rates are going up," said Ed Rogers, a Republican strategist who worked in the elder Bush's White House. "It's hard to celebrate an interest rate increase from a political standpoint."
Rich Bond, a GOP strategist who has advised the incumbent president and his father, noted that one rate increase is painless, but further rate increases could spell trouble.
"Would the Fed venture past a single rate increase to more in the fall?" Bond asked. "From a consumer perspective and economic perspective, that would be totally unwise. From a political perspective, it would be completely unwelcome."
Still, Bush's presumed Democratic opponent, Sen. John F. Kerry of Massachusetts, found it difficult to attack the increase. In the Kerry campaign's formal response, economic advisor Gene Sperling criticized Bush for increasing the federal budget deficit, which Sperling said would result in higher long-term interest rates. Sperling declined comment on the Fed's decision because "John Kerry respects the independence of the Federal Reserve."
Such demurrals notwithstanding, interest rate decisions are scrutinized for political significance, especially in an election year. In this instance, analysts say, the political damage to Bush may be limited because rates remain extremely low.
"Although the rate is moving in the wrong direction, from the perspective of the consumer the level is still pretty darn good," said David Wyss, chief economist at Standard & Poor's. "You're not going to see the real pain until we get into next year."
And whatever political problems are created by rising interest rates, the Fed action may spare Bush another form of economic grief by keeping inflation in check.
If, in the end, Bush is bolstered by the Fed's decision, it will be an ironic turnabout for his family. Bush's father blamed Alan Greenspan, who has been Fed chairman for almost 17 years, for his failure to win reelection in 1992. Although the economy had begun to recover from a recession before election day that year, it was not yet apparent to voters and economic analysts. And while the Fed had steadily cut interest rates throughout the elder Bush's term, administration officials blamed Greenspan for not doing so more aggressively to stimulate the economy.
"Alan Greenspan disappointed me," Bush told British interviewer David Frost in 1998. "I think if the interest rates had been lowered more dramatically . I would have been reelected president, because then the recovery that we were in would have been more visible."
The incumbent is in a different, and apparently stronger, political position than his father. The economy's recovery has begun well in advance of the Nov. 2 election, thanks in part to Greenspan's willingness to slash the key interest rate to 1%, the lowest in 46 years, and keep it there for more than a year.
"The Fed has been accommodative for a remarkably long time," said Greg Valliere, chief political strategist at the Schwab Washington Research Group. "I don't think anyone could accuse Greenspan of being an obstacle in Bush's political campaign."