Political Reaction

Who says now the Federal Reserve Board chairman Mr Alan Greenspan is above politics?

The surprise decision of the Fed to cut interest rates is being widely interpreted here as a shot across the bows of the incoming Bush administration, a signal that Mr Greenspan does not approve of the $1.3 trillion (€1.4 trillion) tax-cutting strategy advocated by the President-elect.

In this view, Mr Greenspan is saying as bluntly as he can that correctives to the economy are best handled through monetary policy than supply side fiscal measures. In other words, a signal of an ideological gulf.

Not so, says Mr George W. Bush, who yesterday praised the cut as a "bold step". "`I am pleased that the Fed has cut the interest rate," he said. "It was a strong statement that measures must be taken to make sure our economy does not go into a tailspin."

He went on to challenge Congress to take another "bold step" and act quickly on his three-year plan to cut income taxes by $1.3 trillion.

His economic adviser, Mr Lawrence Lindsey, architect of the tax-cutting strategy and who has recently attributed the extended US boom to President Ronald Reagan's radical tax cutting rather that President Bill Clinton's stewardship, said that the rate cut did not in any way undermine the case for the Bush tax cuts. People are going to need the extra cash for the period ahead, he insisted.

In this view, the Fed has merely confirmed the prognosis of Mr Bush and Mr Lindsey of a real danger of US recession and this has no policy implications.

In recent years the message from Mr Greenspan, who had a poor relationship with President Bush senior, has been one that has helped Mr Clinton resist pressure for Republican tax cuts. The Fed boss argued the Democrat case that the priority in the face of a looming surplus was to pay down the country's massive public debt. But he is no economic liberal and believes that in the long run tax cuts help an economy - he certainly prefers them to increased public spending.

Bush supporters hope that the logic of that position will be an acceptance by the Fed chairman than the ever-increasing projections of surplus mean that the two positions will be reconcilable. Debt reduction and a substantial tax cut.

There have been signs in Congress that although opposed to Mr Bush's determination to talk down the economy, seen as an attempt to blame Mr Clinton for the slowdown, but perhaps contributing to it, moderate Democrats are beginning to accept that the circle can be squared. They are saying they will accept a large tax cut, although not as large as proposed.

On Wednesday morning, before the Fed moved, the House minority leader Mr Richard Gephardt signalled a willingness to support a bigger tax cut than the $500 billion package Democrats proposed last year. "Obviously, we are now looking at larger amounts than that because of the enlarged surplus projections and because of the slowing in the economy," Mr Gephardt told NBC.

Senator Tom Daschle, the Democratic leader in the Senate, still reflects an important difference in approach. "I think most economists would argue that reducing the interest rate has more immediate impact on spurring the economy than anything we can do with taxes," he told the New York Times yesterday.

"So I think it does to a certain extent take away the argument that we've got to point to taxes as the only way to continue to see this economic growth. We're going to be able to do it and we can do it through lower interest rates."

Many economists share that view. "The message is also for the Bush administration, that the Fed can take care of the economy, thank you very much," Ms Diane Swonk at BancOne in Chicago told ABC NEWS. "Tax cuts are not necessary."

But Republicans hope to seize the economic moment and push for even more. "If anything, we ought to be talking about doing the tax cut sooner, implementing it quicker or doing a bigger tax cut," said Senator Phil Gramm.

At Mr Bush's Texas economic summit with business leaders there was strong support for the rate cut and scepticism that it was a political challenge to the new administration. "That seems to me to a bit too clever by half," Mr Robert Dederick of the Northern Trust, told the Washington Times. "This is a Fed that does not want to see a risk of recession, let alone a recession." Mr Greenspan was keeping his counsel.