THE MONETARY MINUET

By GEORGE J. CHURCH

BILL CLINTON IS IN A TICKLISH SPOT. He needs the Federal Reserve Board to help ward off the threat of a recession that could gravely wound or even kill his re-election bid. But he dare not put any overt pressure on the fiercely independent Fed, or on its Republican-appointed chairman, Alan Greenspan. And though the President has been pointedly silent about whether he will reappoint Greenspan when his term expires March 1, few people in Washington think he would risk dumping him. There would be too much hell to pay in Congress, on Wall Street and in the business community, where Greenspan is an inflation-conquering hero.

Greenspan, however, has motives beyond his own job security for at least partly accommodating White House wishes. The Fed chairman would badly tarnish his reputation as a prudent monetary watchdog if he allowed a recession to develop by keeping interest rates too high for too long. And he can now claim victory in the fight against inflation that he had long rated more important than promoting economic growth. Last year was the fourth in a row in which consumer prices rose by less than 3%, a period of stability unmatched in three decades.

So Greenspan last week made a pump-priming move: he led the board in reducing two key interest rates, the federal funds rate and the discount rate, by a quarter-point each. That prompted major banks to lower the prime lending rates granted to their best customers by the same amount, to 8 1/4%. The discreet adjustment, his third since July, also drew an ever so discreet statement from the Administration praising the cut while stressing respect for the Fed's independence.

So political punctilio was preserved, but what will happen to American jobs and incomes? The latest figures show that the economy was slowing dramatically as 1995 wore to a close. Christmas sales were even more dismal than first thought; December retail totals rose a mere 0.3% above November's. Year-end inventories of unsold cars were high enough to cause General Motors, Ford and Chrysler to cut some assemblies in January. Consumer confidence, as measured by the Conference Board, a business-research group, fell to a two-year low.

Edward Yardeni, a prominent New York City investment economist, thinks there is a 60% to 70% chance that the U.S. is already in a recession. (A rule-of-thumb definition of recession is a decline in national output that lasts at least two consecutive quarters.) Very few of his colleagues agree, but many of them believe that right now output is growing at an annual rate of only 1% or so. The National Association of Purchasing Management is more pessimistic. Enough of its members reported their companies' manufacturing output declining in January to suggest that the economy as a whole shrank last month.

Even a 1% growth rate would be insufficient over the long run to prevent an increase in unemployment. Sure enough, the jobless rate in January rose to 5.8% from 5.6% in December, returning to the top end of the range it held throughout 1995. More ominously, total payroll employment dropped by 201,000 jobs, the biggest decline in nearly five years. The Labor Department put much of the blame on the East Coast blizzard, but some economists suspect that even with normal weather employment would have been flat.

The upshot: a business expansion that is at some risk of dying of old age (it began in March 1991) needs more stimulus than the Fed is giving it. Or so say many economists. Last week's tweak is "too little, too late," argues Allan Meltzer, professor of political economy at Carnegie-Mellon University. Says Irwin Kellner, chief economist of Chemical Bank: "A quarter point will help a wee bit, but it's going to take more than that to get this economy going." One signpost: house sales lately have been flat, despite a drop in mortgage rates.

If most economists still expect continued growth this year--and they do--that is partly because they think the Fed will cut interest rates some more. They further expect business spending for new plant and equipment and strong export sales to take up slack from consumers. Also, says economist Bernard Weinstein of the University of North Texas, "you don't have a recession in an election year."

Clinton, however, has fewer options for pumping up the economy than previous Presidents enjoyed. Taxes will be cut only if Clinton and Congress can reach a budget agreement, and that is hardly assured. A big surge in federal spending is out of the question in today's political climate.

The President does have a chance to nudge the Fed a bit more, legitimately. To fill the just-vacated post of vice chairman, the Administration has been floating the name of Felix Rohatyn, a top investment- banking dealmaker at Lazard Freres. Rohatyn, a Democrat best known as the head of the municipal corporation that saved New York City from bankruptcy in the 1970s, has both the assertive personality and the towering reputation on Wall Street to voice progrowth arguments forcefully inside the board. In any case, to keep the economy humming, the budget-bound President has only one place to look: It's the Fed, stupid.

--Reported by Deborah Fowler/Houston, J.F.O McAllister/Washington and Thomas McCarroll/New York

With reporting by DEBORAH FOWLER/HOUSTON, J.F.O MCALLISTER/ WASHINGTON AND THOMAS MCCARROLL/NEW YORK