WASHINGTON -- Going against conventional wisdom, the Federal Reserve is raising interest rates in an election year. And it is Fed chairman Alan Greenspan, a Republican, who is leading the charge even though an incumbent Republican in the White House is facing voter unrest about the state of the economy.
And in what is seemingly the strangest twist of all, President Bush and his economic team are not criticizing the moves, but rather are pointing to the rate increases as a sign of economic strength. To demonstrate support for Greenspan, Bush renominated him for a fifth term just shortly before the rate increases began in June.
So what's going on?
Many economists believe the younger Bush, mindful of his father's rocky relations with Greenspan, has gone out of his way to establish a cordial working relationship with the Fed chief. They also say times are different now.
"When Bush's father was running for re-election, he had an economy that just didn't seem to be coming out of recession. This time around the recession started earlier and that has allowed the economy to turn the corner before the election," said David Wyss, chief economist at Standard & Poor's in New York.
Still, the economy has 1.1 million fewer jobs now than when Bush took office, allowing Sen. John Kerry, Bush's Democratic opponent, to contend that Bush's jobs record is the worst since Herbert Hoover. And while job growth did rebound to respectable levels earlier this year, job creation has nearly stalled out the past two months, with just 32,000 jobs created in July.
Yet when the Fed last Tuesday raised a key interest rate by a quarter-point, the administration's response was to say it respected the Fed's independence -- a far different approach than the one taken by the elder Bush.
Bush's father blamed Greenspan for contributing to his defeat in 1992 by failing to cut interest rates quickly enough to generate a strong recovery before voters went to the polls.
The earlier Bush administration certainly tried to pressure the Fed to speed up its interest rate reductions in the year leading up to the 1992 election. At one point, Nicholas Brady, Bush's Treasury secretary, grew so annoyed with Greenspan that he abruptly cut off his weekly meetings with the Fed chief.
Such an effort was nothing unusual in the long history of often strained relations between the White House and the Federal Reserve.
One of the most famous incidents involved the legendary William McChesney Martin, the only Fed chairman to have served longer than Greenspan's 17 years. Martin was Fed chief from 1951 to 1970, a period spanning the terms of five presidents, from Harry Truman to Richard Nixon. In 1965, President Lyndon Johnson summoned Martin to LBJ's Texas ranch to express his displeasure about a recent Fed rate increase. As part of the lobbying, Johnson took Martin on a jolting drive around the ranch in Johnson's Lincoln Continental.
But despite a full dose of the Johnson treatment, Martin stood his ground.
Paul Volcker, Greenspan's predecessor, was summoned to a meeting with President Ronald Reagan and James A. Baker III, Reagan's chief of staff, in the White House library in the summer of 1984. Baker bluntly told Volcker, with Reagan looking on, that the administration did not want any increases in interest rates that might hurt Reagan's re-election chances.
"If you want to talk about crass politics, that is about as crass as it gets," said David Jones, the author of four books on the Greenspan Fed.
In contrast, the current occupant of the White House made it a point to have his first meeting in Washington after winning the disputed Florida election in 2000 with Greenspan. Then in April 2003, more than a year before Greenspan's term was up, Bush announced that he planned to nominate him for a fifth term this year.
When the Fed announced June 30 that it was boosting interest rates for the first time in four years, the administration uttered not a word of criticism, but simply pointed out that a stronger economy often results in higher interest rates.
After the second rate hike last Tuesday, the Bush campaign e-mailed out excerpts of the Fed's rate hike announcement, noting references to an expected rebound in growth.
Many economists believe Bush has adopted his predecessor, President Bill Clinton, as his role model on Fed relations.
During the Clinton administration, Treasury Secretary Robert Rubin, a Wall Street veteran, enforced a code of silence concerning Fed actions. The belief was that any perceived criticism would be counterproductive, worrying investors that the Fed might bend to pressure and not aggressively discharge its duties to keep inflation under control.
"For years and years, some degree of tension was standard operating procedure in White House-Fed operations. Clinton marks a real turning point in those relations," said Thomas Schlesinger, director of the Financial Markets Center, a Philomont, Va., research organization that specializes in studying the Fed.
But other economists said the Bush administration's hands are tied. With Bush running for re-election on the basis that the economy is growing stronger under his leadership, any criticism of the Fed for jeopardizing what is supposedly a solid recovery could backfire.
"The administration is in a bit of a political bind. They can't complain about the Fed without saying the economy is doing poorly, something they don't want to say," Wyss said.
Many analysts said the Fed's steady, gradual approach to raising rates seemed to be just what is called for now, given that it's unclear how long the economic soft patch will last, and the fact that inflation pressures, aside from energy, have been largely dormant.
"The Fed doesn't want inflation to get away from them, but at the same time I think they want to be as supportive of the administration as they can," said Peter Morici, a business school professor at the University of Maryland.